FIN 472: Principles of Finance

Chapter 5: Stocks and Stock Valuation

Assignment 5

1.How does the approach of the three-step valuation differ for stocks vs. bonds?

2.Explain the difference between par value, book value, and market value for a common stock. Which is most important? Why?

3.What is meant by market efficiency? What are the three types of market efficiency?

4.What rights are given to stockholders? Explain each.

Alternative Assignment 5

1.Problem 1.

You have a preferred stock with an $80 par value. The stock has a required return of 7% and the dividend is 6% of par value. How much should you pay for this stock?

2.Problem 3.

Stock C just paid a dividend (D0) of $2. The required return is 12%. Find the price of the stock when the growth rates are

3a. 0%

3b. 5%

3c. 10%

3d. 15%,

3e. Does your answer seem reasonable? Explain

3.Problem 5.

Price a supernormal (nonconstant) growth stock with the following information: Current Dividend (D0) is $1.50

growth rate year 1 is -10%

growth rate year 2 is 0%

growth rates years 3-4 are 20%

growth rate year 5 is 150%

growth rate years 6 through infinity is 3%

required return is 15%