MUTUAL OF CHICAGO INSURANCE COMPANY 9-23 STOCK VALUATION Robert Balik and Carol Kiefer are senior vice presidents of Insurance Company. They are codirectors of the company's pension fund manager Kiefer are senior vice presidents of the Mutual of Chicago having responsibility for fixed-income securities primarily bonds) and Kiefer being hpany's pension fund management division, with Balik investments. A major new client, the California Leke of Cities, has requested les primarily bonds) and Kiefer being responsible for equity present an investment seminar to the mayors of the represented cities, and Balik and a League of Cities, has requested that Mutual of Chicago the actual presentation, have asked you to help them. mayors of the represented cities, and Balik and Kiefer, who will make To illustrate the common stock valuation process. Boli and Kiefer have asked you to ana and Kiefer have asked you to analyze the Bon Temps Company, an employment agency that supplies word-processor operatora programmers to businesses with temporarily heavy workloads. You are to answer the to orkloads. 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 that exceeds its r.? Will many stocks have expected g r, in the short run (ie, for the next few years)? In the long run (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 rate of return on the market is 8%. What is Bon Temps's required rate of return? d. Assume that Bon Temps is a constant growth company whose last dividend (Do, which was paid yesterday) 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