Stock Valuation Robert Balik and Carol Keifer are senior vice presidents of the 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: e. Now assume that the stock is currently selling at $40.00. What is its expected rate of return? f. What would the stock price be if its dividends were expected to have zero growth? g. Now assume that Bon Temps's dividend is expected to grow 30% the first year, 20% the second year, 10% the third year, and return to its long-run constant growth rate of 4%. What is the stock's value under these conditions? What are its expected dividend and capital gains yields in Year 1 ? In Year 4? 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 rn ? Will many stocks have expected g