Question
1. AlvarezIndustriesstockcurrentlysellsfor$40ashare.Itjustpaidadividendof$1.92a share(thatis,D0=$1.92).Thedividendisexpectedtogrowataconstantrateof5.8 percentayear.Whatstockpriceisexpected1yearfromnow? 2.McClellandEnterprisesinvestsalotofmoneyinR&D,andasaresultitretainsand reinvestsallofitsearningsinsteadofpayingdividends.Apensionfundmanageris interestedinpurchasingMcClellandsstockandhasestimateditsfreecashflowsforthe next3yearsasfollows:$5million,$7million,and$11million.Afterthe3rdyear,FCF isprojectedtogrowataconstant10percent.McClellandsWACCis14percent,itsdebt andpreferredstocktotal$70million,andithas3millionsharesofcommonstock outstanding.WhatisthevalueofMcClellandsstockprice? 3.StockCsbetacoefficientisbC=0.9.Theriskfreerateis5percent,andtheexpected returnonanaveragestockis10percent.ThecurrentpriceofStockC,P0,is$40the nextexpecteddividend,D1,is$2.00andthestocksexpectedconstantgrowthrateis2 percent.Whichofthefollowingiscorrect? a.StockCisfairlypricedandinequilibrium. b.StockCisovervalued.Itspricewillfalltorestoreequilibrium. c.StockCisovervalued.Itspricewillrisetorestoreequilibrium.
1. AlvarezIndustriesstockcurrentlysellsfor$40ashare.Itjustpaidadividendof$1.92a share(thatis,D0=$1.92).Thedividendisexpectedtogrowataconstantrateof5.8 percentayear.Whatstockpriceisexpected1yearfromnow?
2.McClellandEnterprisesinvestsalotofmoneyinR&D,andasaresultitretainsand reinvestsallofitsearningsinsteadofpayingdividends.Apensionfundmanageris interestedinpurchasingMcClellandsstockandhasestimateditsfreecashflowsforthenext3yearsasfollows:$5million,$7million,and$11million.Afterthe3rdyear,FCF isprojectedtogrowataconstant10percent.McClellandsWACCis14percent,itsdebt andpreferredstocktotal$70million,andithas3millionsharesofcommonstock outstanding.WhatisthevalueofMcClellandsstockprice?
3.StockCsbetacoefficientisbC=0.9.Theriskfreerateis5percent,andtheexpected returnonanaveragestockis10percent.ThecurrentpriceofStockC,P0,is$40the nextexpecteddividend,D1,is$2.00andthestocksexpectedconstantgrowthrateis2 percent.Whichofthefollowingiscorrect? a.StockCisfairlypricedandinequilibrium.
b.StockCisovervalued.Itspricewillfalltorestoreequilibrium.
c.StockCisovervalued.Itspricewillrisetorestoreequilibrium.
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Fundamentals of Investments, Valuation and Management
Authors: Bradford Jordan, Thomas Miller, Steve Dolvin
8th edition
ISBN: 1259720697, 1259720691, 1260109437, 9781260109436, 978-1259720697
