Advanced Financial Management Stock Valuation Exercise 1. Suppose a company has a preferred stook issue and a common stock issue. Both have just paid a dividend of RM2. Which do you think will have higher price, a share of preferred or a share of common stock? 2. The price of Dwayne Corporation stock is expected to be RM68 in 5 years. Dividends are anticipated to increase at an annual rate of 10 percent from the most recent dividend of RM1.00. If your required rate of return is 15 percent, how much are you willing to pay for Dwayne stock now? 3. You are considering the purchase of BIG Company's common stock. You anticipate that the company will pay dividends of RM2.00 per share next year and RM2.25 the following year. You anticipate that after the second year, the dividend is going to grow at a constant rate of 5 percent per year indefinitely. However, you plan to hold the stock for only four years, and you believe that you can sell the stock for RM20.50 per share at that time. If your required rate of return is 12 percent, what is the maximum price that you would pay for a share of BIG Company stock? 4. A company is preparing to pay its first dividend. It plans to pay RM1.00, RM2.50 and RM5.00 a share over the next three years respectively. After that, the annual dividend will be fixed at RM1.25 per share for the next 10 years before it levels off at a constant growth rate of 3 percent indefinitely. The current market price of the stock is RM22. If you demand a 10 percent rate of return, will you purchase this company's common stock? 5. Company KK recently paid a RM3.60 annual dividends on their common stock This dividend increases at an average rate of 3.5 percent per year. The stock is currently selling for RM62.10 a share. If you were to purchase Company X's stock today, what is your expected return on this investment? 6. A company plans to pay an annual dividend of RM2.08 a share on their common stock this year. Last recently paid dividend was RM2.00 a share. The company practices a constant rate of growth in its dividend policy. How much will one share of this the stock be worth ten years from today of the required rate of return is 8 percent