I can't do problems 1b and all of 3. Please help me out..

Stock Valuation Peachtree Securities, Inc. (B) Laura Donahue, the recently hired utility analyst for Peachtree Securities, passed her first assignment with flying colors. After presenting her seminar on risk and return, any customers where clamoring for a second lecture. Therefore, Jake Taylor, Peachtree's president, gave Donahue her second task: determine the value of TECO Energy's securities (common stock, preferred stock, and bonds) and prepare a seminar to explain the valuation process to the firm's customers. To begin, Donahue reviewed the Value Line Investment Survey data. Next Donahue examined Teco's latest Annual Report, especially Note E to the Consolidated Financial Statements. This note lists TECO's long-term debt obligations, including its first- mortgage bonds, installment contracts, and term loans. Table 1 contains information on three of the first- mortgage bonds listed in the Annual Report. Table 1 Partial Long Term Debt Listing for TECO Energy Face Amount $ 48,000,000 32,000,000 100,000,000 Coupon Rate 4 1/2% 8 12 5/8 Maturity Year 1997 2007 2017 Years to Maturity 5 15 25 Note: The terms stated here are modified slightly from the actual terms to simplify the case. A concern which immediately occurred to Donahue was the phenomenon of \"event risk.\" Recently, many investors have shied away from the industrial bond market because of the wave of leveraged buyouts (LBOs) and debt-financed corporate takeovers that took place during the 1980s. These takeovers were financed by issuing large amounts of new debtoften high-risk \"junk\" bondswhich caused the credit rating of the firm's existing bonds to drop, the required rate of return to increase, and the price of the bonds to decline. Donahue wondered if this trend would affect the required returns on TECO's outstanding bonds. Upon reflection she concluded that TECO's bonds would be much less vulnerable to such event risk because TECO is a regulated public utility. Public utilities and banks are less vulnerable to takeovers and leveraged buyouts, primarily because their regulators would have to approve such restructurings, and it is unlikely that they would permit the level of debt needed for an LBO. Therefore, many investors have turned to government bonds, mortgage-backed issues, and utility bonds in lieu of publicly traded corporate bonds. As a result, Donahue concluded that the effect, if any, of the increased concern about event risk will be to lower TECO's cost of bond financing. Value Line provided the following information: Teco's recent price ws $38 per share with a P/E of 14.6 and a dividend yield of 4.8%. It's beta is .60. ROE 1989 1990 1991 1992 1993 Estimated 95-97 15.3% 16.8% 16.0% 15.0% 15.0% 16.% Pay-Out Ratio 67% 66% 67% 69% 70% 67% March 31 1989 1990 1991 1992 1993 Jun 30 Earnings Per Share Sept 30 Dec 31 Full Year .49 .48 .46 .47 .50 .62 .68 .67 .68 .72 .80 .80 .86 .90 .95 2.36 2.45 2.55 2.60 2.75 .45 .49 .56 .55 .58 Estimated 95-97 3.30 March 31 1989 1990 1991 1992 1993 Jun 30 .335 .355 .38 .405 .43 Quarterly Dividends Paid Per Share Sept 30 Dec 31 Full Year .355 .38 .405 .43 .355 .38 .405 .43 .355 .38 .405 .43 Estimated 95-97 1.40 1.50 1.60 1.70 1.90 2.25 Annual Rates Revenues Cash Flow Earnings Dividends Book Value ROE Past 10-Years 1.5% 6.5% 6.0% 7.5% Past 5-Years 5.5% 8.0% 6.5% 6.5% Est'd '89-'91 to '95-'97 5.0% 4.0% 5.0% 6.0% 4.5% 3.5% 5.5% 16.2% With these considerations in mind, your task is to answer the following questions. Questions 1. TECO has $54,956,000 of preferred stock outstanding. a. Suppose its Series A, which has a $100 par value and pays a 4.32 percent cumulative dividend, currently sells for $48.00 per share. What is its nominal expected rate of return? It's effective annual rate of return? (Hint: Remember that dividends are paid quarterly. Also, assume that this issue is perpetual.) b. Suppose a Series F, with a $100 par value and a 9.75 percent cumulative dividend, has a mandatory sinking fund provision. 60,000 of the 300,000 total shares outstanding must be redeemed annually at par beginning at the end of 1993. If the nominal required rate of return is 8.0 percent, what is the current (January 1, 1993) value per share? 2. Now consider TECO's common stock. Value Line estimates TECO's 5- year dividend growth rate to be 6.0 percent. Assume that TECO's stock traded on January 1, 1992 for $22.26. Assume for now that the 6.0 percent growth rate is expected to continue indefinitely. a. What was TECO's expected rate of return at the beginning of 1992? Value Line estimate Teco's dividends to be $1.80 at the start of 1992. b. What was the expected dividend yield and expected capital gains yield on January 1, 1992? c. What is the relationship between dividend yield and capital gains yield over time under constant growth assumptions? d. What conditions must hold to use the constant growth (Gordon) model? Do many \"real world\" stocks satisfy the constant growth assumptions? 3. Suppose you believe that TECO's 6.0 percent dividend growth rate will only hold 5 years. After that, the dividend growth rate will return to TECO's historical 10-year average of 7.5 percent. Note that D6 = D5 x 1.075. a. b. c. d. What was the value of TECO stock on January 1, 1992 (the end of 1991), if the required rate of return is 13.5 percent? Remember this value you calculate does not have to agree with the market value of $22.26. What is the expected stock price at the end of 1992 (beginning of 1993) assuming that the stock is in equilibrium? What is the expected stock price at the end of 1993 (beginning of 1994) assuming that the stock is in equilibrium? What is the expected dividend yield, capital gains yield, and total return for 1992? Hint: You need the expected January 1, 1992 price to compute. e. f. g. h. Suppose TECO's dividend was expected to remain constant at $1.80 for the next 5 years and then grow at a constant 6 percent rate. If the required rate of return is 13.5 percent, would TECO's stock value be higher or lower than your answer in Part a (calculate the answer)? TECO's stock price was $22.26 at the beginning of 1992. Using the growth rates given in the introduction to this question, what is the stock's expected rate of return? Based on the information provided in Value-Line Tables is the assumed 6 % growth rate reasonable? What has been the trend? Given Value-Line's ROE estimated for 1995 through 1997 and at the projected earnings and dividends per share for the same period. Could those figures be used to develop an estimated long-run \"sustainable\" growth rate? Does this figure support the 7.5 percent growth rate given in the problem? [Hint: Think of the formula g = br = (Retention ratio)(ROE).]