INTEGRATED CASE MUTUAL OF CHICAGO INSURANCE COMPANY 9-23 STOCK VALUATION Robert Balik and Carol Kiefer are senior vice presidents of the Mutual of Chicago Insurance Company. They are codirectors of the company's pension fund management division, with Balik having responsibility for fixed-income securities (primarily bonds) and Kiefer being responsible for equity investments. A major new client, the California League of Cities, has requested that Mutual of Chicago present an investment seminar to the mayors of the represented cities; and Balik and Kiefer, who will make the actual presentation, have asked you to help them. To illustrate the common stock valuation process, Balik and Kiefer have asked you to analyze the Bon Temps Company, an employment agency that supplies word-processor operators and computer programmers to businesses with temporarily heavy workloads. You are to answer the following questions: a. Describe briefly the legal rights and privileges of common stockholders. b. 1. Write a formula that can be used to value any stock, regardless of its dividend pattern. 2. What is a constant growth stock? How are constant growth stocks valued? 3. What are the implications if a company forecasts a constant g that exceeds its r,? Will many stocks have expected g >r, in the short run (i.e, for the next few years)? In the long run (i.e, forever)? c. Assume that Bon Temps has a beta coefficient of 1.2, that the risk-free rate (the yield on T-bonds) is 3%, and that the required return? rate of return on the market is 8%, what is Bon Temps's required rate of a constant growth company whose last dividend (Do, which was paid d. Assume that Bon Temps is esterday) was $2.00 and whose dividend is expected to grow indefinitely at a 4% rate. 1. What is the firm's expected dividend stream over the next 3 years? 2. What is its current stock price