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Chapter 4: 13DQ (page 320)
What approaches can be taken in valuing a firm鈥檚 stock when there is no cash dividend payment?
Under no dividend case, the stock is valued based on the present value of earnings per share and anticipated future stock price.
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Question: You need $28,974 at the end of 10 years, and your only investment outlet is an 8 percent long-term certificate of deposit (compounded annually). With the certificate of deposit, you make an initial investment at the beginning of the first year.
a. What single payment could be made at the beginning of the first year to achieve this objective?
b. What amount could you pay at the end of each year annually for 10 years to achieve this same objective?
Question:Maxwell Communications paid a dividend of $3 last year. Over the next 12 months, the dividend is expected to grow at 8 percent, which is the constant growth rate for the firm (g). The new dividend after 12 months will represent D1. The required rate of return (Ke) is 14 percent. Compute the price of the stock (P0)
Sampson Corp. is evaluating the introduction of a new product. The possible levels of unit sales and the probabilities of their occurrence are shown next:
Possible Market Reaction Sales in Units Probabilities
Low response ....................................... 30 0.10
Moderate response .............................. 50 0.20
High response ...................................... 75 0.40
Very high response ............................... 90 0.30
a. What is the expected value of unit sales for the new product?
b. What is the standard deviation of unit sales?
Question: You wish to retire in 14 years, at which time you want to have accumulated enough money to receive an annual annuity of \(17,000 for 19 years after retirement. During the period before retirement you can earn 8 percent annually, while after retirement you can earn 10 percent on your money. What annual contributions to the retirement fund will allow you to receive the \)17,000 annuity?
Question:Masco Oil and Gas Company is a very large company with common stock listed on the New York Stock Exchange and bonds traded over the counter. As of the current balance sheet, it has three bond issues outstanding:
\(150 million of 10 percent series ....... 2026
\)50 million of 7 percent series ........... 2020
\(75 million of 5 percent series ........... 2016
The vice president of finance is planning to sell \)75 million of bonds next year to replace the debt due to expire in 2016. Present market yields on similar Baa-rated bonds are 12.1 percent. Masco also has \(90 million of 7.5 percent noncallable preferred stock outstanding, and it has no intentions of selling any preferred stock at any time in the future. The preferred stock is currently priced at \)80 per share, and its dividend per share is \(7.80.
The company has had very volatile earnings, but its dividends per share have had a very stable growth rate of 8 percent and this will continue. The expected dividend (D1) is \)1.90 per share, and the common stock is selling for \(40 per share. The company鈥檚 investment banker has quoted the following flotation costs to Masco: \)2.50 per share for preferred stock and $2.20 per share for common stock.
On the advice of its investment banker, Masco has kept its debt at 50 percent of assets and its equity at 50 percent. Masco sees no need to sell either common or preferred stock in the foreseeable future as it has generated enough internal funds for its investment needs when these funds are combined with debt financing. Masco鈥檚 corporate tax rate is 40 percent. Compute the cost of capital for the following:
a. Bond (debt) (Kd).
b. Preferred stock (Kp).
c. Common equity in the form of retained earnings (Ke).
d. New common stock (Kn).
e. Weighted average cost of capital.
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