1.

The dividend-growth model may be used to value a stock:

Round your answers to the nearest cent.

$

$

$

$

$

1. What is the value of a stock if: D₀ = $4.70 k = 13% g = 8%
2. What is the value of this stock if the dividend is increased to $5.90 and the other variables remain constant?
3. What is the value of this stock if the required return declines to 10 percent and the other variables remain constant?
4. What is the value of this stock if the growth rate declines to 6 percent and the other variables remain constant?
5. What is the value of this stock if the dividend is increased to $5.80, the growth rate declines to 6 percent, and the required return remains 13 percent?

2.

Last year Artworks, Inc. paid a dividend of $4.20. You anticipate that the companys growth rate is 5 percent and have a required rate of return of 12 percent for this type of equity investment. What is the maximum price you would be willing to pay for the stock? Round your answer to the nearest cent.

$

3.

An investor with a required return of 15 percent for very risky investments in common stock has analyzed three firms and must decide which, if any, to purchase. The information is as follows:

Firm		A		B		C
Current earnings	$	1.60	$	2.80	$	6.80
Current dividend	$	1.30	$	3.50	$	8.50
Expected annual growth rate in		8	%	4	%	-3	%
dividends and earnings
Current market price	$	28	$	39	$	52

Stock A: $

Stock B: $

Stock C: $

%

Stock A: $

Stock B: $

Stock C: $

1. What is the maximum price that the investor should pay for each stock based on the dividend-growth model? Round your answers to the nearest cent.
2. If the investor does buy stock A, what is the implied percentage return? Round your answer to two decimal places.
3. If the appropriate P/E ratio is 19, what is the maximum price the investor should pay for each stock? Round your answers to the nearest cent.
4. If the appropriate P/E ratio is 7, what is the maximum price the investor should pay for each stock? Round your answers to the nearest cent.

   Stock A: $

   Stock B: $

   Stock C: $

4.

TSC, Inc. sells for $23 and pays an annual per share dividend of $2.10, which you expect to grow at 9 percent. What is your expected return on this stock? Round your answer to the two decimal places.

%

What would be the expected return if the price were $34 a share? Round your answer to the two decimal places.

%

5.

Jersey Jewel Mining has a beta coefficient of 1.7. Currently the risk-free rate is 1 percent and the anticipated return on the market is 6 percent. JJM pays a $4.30 dividend that is growing at 4 percent annually. Do not round intermediate calculations.

%

$

The stock -Select-isis notItem 3 overvalued and -Select-shouldshould notItem 4 be purchased.

$

The stock is -Select-overvaluedundervaluedItem 6 and -Select-shouldshould notItem 7 be purchased.

1. What is the required return for JJM? Round your answer to two decimal places.
2. Given the required return, what is the value of the stock? Round your answer to the nearest cent.
3. If the stock is selling for $106, what should you do?
4. If the beta coefficient declines to 1.4, what is the new value of the stock? Round your answer to the nearest cent.
5. If the price remains $106, what course of action should you take given the valuation in d?

6.

The risk-free rate of return is 4 percent, and the expected return on the market is 8.4 percent. Stock A has a beta coefficient of 1.3, an earnings and dividend growth rate of 5 percent, and a current dividend of $2.60 a share. Do not round intermediate calculations. Round your answers to the nearest cent.

$

The stock -Select-shouldshould notItem 2 be purchased.

$

$

$

The increase in the return on the market -Select-increasesdecreasesItem 6 the required return and -Select-increasesdecreasesItem 7 the value of the stock.

The increase in the risk-free rate and the simultaneous increase in the return on the market cause the value of the stock to -Select-increasedecreaseItem 8 .

The decrease in the beta coefficient causes the firm to become -Select-lessmoreItem 9 risky as measured by beta, which -Select-increasesdecreasesItem 10 the value of the stock.

1. What should be the market price of the stock?
2. If the current market price of the stock is $41.00, what should you do?
3. If the expected return on the market rises to 10.4 percent and the other variables remain constant, what will be the value of the stock?
4. If the risk-free return rises to 6 percent and the return on the market rises to 10.6 percent, what will be the value of the stock?
5. If the beta coefficient falls to 1.1 and the other variables remain constant, what will be the value of the stock?
6. Explain why the stocks value changes in c through e.

7. The security market line is estimated to be

k=4% + (13% - 4%).

You are considering two stocks. The beta of A is 1.6. The firm offers a dividend yield during the year of 4 percent and a growth rate of 5.2 percent. The beta of B is 2.0. The firm offers a dividend yield during the year of 4.7 percent and a growth rate of 4.7 percent.

Stock A: %

Stock B: %

The difference in the required rates of return is the result of -Select-stock Astock BItem 3 being riskier.

Stock A -Select-shouldshould notItem 4 be purchased.

Stock B -Select-shouldshould notItem 5 be purchased.

-Select-Stock AStock BNeither of stocksBoth stocksItem 6 should be purchased.

1. What is the required return for each security? Round your answers to two decimal places.
2. Why are the required rates of return different?
3. Since A offers higher potential growth, should it be purchased?
4. Since B offers higher dividend yield, should it be purchased?
5. Which stock(s) should be purchased?

8. Two stocks each currently pay a dividend of $1.70 per share. It is anticipated that both firms dividends will grow annually at the rate of 5 percent. Firm A has a beta coefficient of 0.97 while the beta coefficient of firm B is 1.11.

Stock A: $

Stock B: $

The beta coefficient of -Select-stock Astock BItem 3 is higher, which indicates the stock's return is -Select-lessmoreItem 4 volatile.

Stock A is -Select-undervaluedovervaluedItem 5 and -Select-shouldshould notItem 6 be purchased.

Stock B is -Select-undervaluedovervaluedItem 7 and -Select-shouldshould notItem 8 be purchased.

1. If U.S. Treasury bills currently yield 4.8 percent and you expect the market to increase at an annual rate of 8.9 percent, what are the valuations of these two stocks using the dividend-growth model? Do not round intermediate calculations. Round your answers to two decimal places.
2. Why are your valuations different?
3. If stock As price were $42 and stock Bs price were $37, what would you do?

9. The dividend-growth model, suggests that an increase in the dividend growth rate will increase the value of a stock. However, an increase in the growth may require an increase in retained earnings and a reduction in the current dividend. Thus, management may be faced with a dilemma: current dividends versus future growth. As of now, investors required return is 11 percent. The current dividend is $1.2 a share and is expected to grow annually by 4 percent, so the current market price of the stock is $17.83. Management may make an investment that will increase the firms growth rate to 8 percent, but the investment will require an increase in retained earnings, so the firms dividend must be cut to $0.9 a share. Should management make the investment and reduce the dividend? Round your answer to the nearest cent.

The value of the stock -Select-risesdeclinesItem 1 to $ , so the management -Select-should notshouldItem 3 make the investment and decrease the dividend.