Stock valuation Robert Balik and Carol Kiefer are senior vice presidents of the mutual of Chicago insurance company. They are co-directors of the company’s pension fund management division, with Balik having responsibility for fixed-income securities (primarily bonds) and Kiefer being responsible for equity investments. A major new client, the California league of cities, has requested that mutual of Chicago present an investment seminar to mayors of the represented cities; and Balik and Kiefer, who will make the actual presentation, have asked you to help them. to illustrate the common stock valuation process, Balik and Kiefer have asked you to analyze the bon temps company, and employment agency that supplies word processor operators and computer programmers to business with temporarily heavy workloads. You are to answer the following questions.

Part A. Describe briefly the legal rights and privileges of common stockholders.

Part B.

1. Write a formula that can b e used to value any stock, regardless of its dividend pattern.

2. What is the constant growth stock? How are constant growth stocks valued?

3. What are the implications if a company forecasts a constant g that exceeds its RS? Will many stocks have expected g> RS in the short run (that is, for the next few years)? In the long run (that is, forever)?

Part C. Assume that bon temps has a beta coefficient of 1.2, that the risk-free rate (the yield on t- bonds) is 7%, and that the required rate of return on the market is 12%. What is bon temp’s required rate of return?

Part D. Assume that bond temps are a constant growth company whose last dividend (d0, which was paid yesterday) was $2.00 and whose dividend is expected to grow indefinitely at a 6% rate.

1. What is the firm’s expected dividend stream over the next 3 years?

2. What is the current stock price?

3. What is the stock’s expected value 1 year from now?

4. What are the expected dividend yield, capital gains yield, and total return during the first year?