Question 2

Quest Financial services balance sheets report $200 million in total debt, $100 million in short-term investments, and $30 million in preferred stock. Quest has 10 million shares of common stock outstanding. A financial analyst estimated that Quest's value of operations is $1000 million. What is the analyst's estimate of the intrinsic stock price per share?

Question 3

Lincoln Incorporated is expected to pay a $4.5 per share dividend at the end of this year (i.e., D1 = $4.50). The dividend is expected to grow at a constant rate of 5% a year. The required rate of return on the stock is, r_s, is 12%. What is the estimated value per share of Boehm stock?

Question 4

Assume that the average firm in Masters Corporation's industry is expected to grow at a constant rate of 3% and that its dividend yield is 5%. Masters is about as risky as the average firm in the industry and just paid a dividend (D₀) of $2.5. Analysts expect that the growth rate of dividends will be 25% during the first year (g_0,1= 25%) and 10% during the second year (g_1,2= 10%). After Year 2, dividend growth will be constant at 5%. What is the required rate of return on Masters's stock? What is the estimated intrinsic per share?

Question 5

Several years ago, Macro Riders issued preferred stock with a stated annual dividend of 5% of its $600 par value. Preferred stock of this type currently yields 10%. Assume dividends are paid annually.

a. What is the estimated value of Macro's preferred stock?

b. Suppose interest rate levels have risen to the point where the preferred stock now yields 14%. What would be the new estimated value of Macro's preferred stock?

Question 6

1. Define each of the following terms:

• Call option
• Put option
• Strike price or exercise price
• Expiration date
• Exercise value
• Option price
• Time value
• Writing an option
• Covered option
• Naked option
• In-the-money call
• Out-of-the-money call
• LEAPS

2. The current price of a stock is $50. In 1 year, the price will be either $65 or $35. The annual risk-free rate is 10%. Find the price of a call option on the stock that has an exercise price of $55 and that expires in 1 year. (Hint: Use daily compounding.)

3. The exercise price on one of Chrisardan Company's call options is $20, its exercise value is $27, and its time value is $8. What are the option's market value and the price of the stock?