Homework Assignment for Week 4:

Chapter 7:

For Week 4, please turn in the answers to the following questions:

1. What are the two kinds of stock corporations issue to finance their assets? List the main characteristics of each.

2. (common stock valuation, constant growth) You?ve discovered a company that is expected to pay $2.25 dividend at the end of this year. The dividend is expected to grow forever at a constant rate of 4% a year. The required rate of return for this stock is 8%. Given these conditions, what is the estimated market value per share of this stock?

3. (common stock valuation, non-constant growth) You?ve discovered a company that is expected to pay $2.25 dividend at the end of this year. You estimate the company?s dividends will grow 10% next year and then at a constant rate of 4% thereafter. The required rate of return for this stock is 8%. Given these conditions, what is the estimated market value per share of this stock?

4. (Issues with the dividend growth model) What are three issues that must be dealt with when evaluating stocks with the dividend growth model?

5. (The PE model) Imagine you are estimating the market value of Wild West Oil Company?s stock, which is not publicly traded. So you decide to use the PE model for your valuation. You observe the following PE Ratio comparisons for your project:

Company PE Ratio (from the Internet)

a. Exxon-Mobil 10

b. Chevron 11

c. ConocoPhillips 14

a. What is the implied ?appropriate? PE for Wild West Oil Company?

b. Assuming Wild West Oil Company?s EPS is = $3.10, what is your estimate for the market

value of the company?s stock?

6. (Preferred stock valuation) You have discovered a company which has issued preferred stock with a stated annual dividend of 6% of its par value of $100. The average yield on preferred stock of this type among other companies is 7%. Given these conditions, what is your estimate of the market value of this company?s preferred stock?

7.(Efficient Market Hypothesis) Define the EMH and explain its three forms.

End of assignment questions

(see answers to numerical problems below)

Answers to numerical problems:

Question 2: $56.25

Question 3: $59.38

Question 5a: 11.67

Question 5b: $36.17

Question 6: $86

Homework Assignment for Week 4: Chapter 7: For Week 4, please turn in the answers to the following questions: 1. What are the two kinds of stock corporations issue to finance their assets? List the main characteristics of each. 2. (common stock valuation, constant growth) You've discovered a company that is expected to pay $2.25 dividend at the end of this year. The dividend is expected to grow forever at a constant rate of 4% a year. The required rate of return for this stock is 8%. Given these conditions, what is the estimated market value per share of this stock? 3. (common stock valuation, non-constant growth) You've discovered a company that is expected to pay $2.25 dividend at the end of this year. You estimate the company's dividends will grow 10% next year and then at a constant rate of 4% thereafter. The required rate of return for this stock is 8%. Given these conditions, what is the estimated market value per share of this stock? 4. (Issues with the dividend growth model) What are three issues that must be dealt with when evaluating stocks with the dividend growth model? 5. (The PE model) Imagine you are estimating the market value of Wild West Oil Company's stock, which is not publicly traded. So you decide to use the PE model for your valuation. You observe the following PE Ratio comparisons for your project: Company a. b. c. Exxon-Mobil Chevron ConocoPhillips PE Ratio (from the Internet) 10 11 14 a. What is the implied \"appropriate\" PE for Wild West Oil Company? b. Assuming Wild West Oil Company's EPS is = $3.10, what is your estimate for the market value of the company's stock? 6. (Preferred stock valuation) You have discovered a company which has issued preferred stock with a stated annual dividend of 6% of its par value of $100. The average yield on preferred stock of this type among other companies is 7%. Given these conditions, what is your estimate of the market value of this company's preferred stock? 7.(Efficient Market Hypothesis) Define the EMH and explain its three forms. End of assignment questions (see answers to numerical problems below) Answers to numerical problems: Question 2: $56.25 Question 3: $59.38 Question 5a: 11.67 Question 5b: $36.17 Question 6: $86