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%

FIN 472: Principles of Finance

Chapter 6: The Financial System and Interest Rates

Assignment 6

1.Explain how the financial system makes both suppliers of capital and demanders of capital better off.

2.Explain why stocks are better suited for financial markets than financial intermediaries.

3.Give an example of a transaction that goes from the supplier to capital to the financial intermediary to the financial markets to the demander of capital.

4.Give an example of a money market security and a capital market security.

Alternative Assignment 6

1.Answer questions 13a, and 13b.

Part: 13a k = krf + IP + DRP + LP + MRP + SCP k = 2% + 3% + 0% + 0% + 0% + 0% = 5%

Part: 13b k = krf + IP + DRP + LP + MRP + SCP k = 2% + 2.5% + 0% + 0% + 0.6% + 0% = 5.1%

1.Draw the yield curve for question 14a.

Yield

6.0%

5.0%

4.0%

3.0%

2.0%

1.0%

0.0%

3 month1 year2 Year5 year10 Year20 Year30 Year

The line goes from the 30% to the 50%, it won't let me draw the line. can you help.