Two investors are considering purchasing Lowe's Companies (LOW) common stock. They agree on the ex- pected values of Div1 ($1.60) and the expected future dividend growth rate (3%). They also agree on the riskiness of the stock and, thus, on the discount rate (required rate of return) of 5%. Assume that the first investor would plan to sell the stock after 2 years and the second investor would plan on selling the stock after 5 years. Would they agree on today's price of the stock, or would they disagree on the price of the stock because of the differ- ences in the two anticipated holding periods? Clearly explain your answer.

Financial Management Assignment 2 Fall 2017 69 pts 1. A stock that John Cougar has just added to his portfolio is expected to pay its first dividend of $2.20 two years from now. The next year, the dividend will increase to $2.40, and at the end of the 4th year, the dividend will increase to $2.70. After the fourth year, future dividends are expected to increase at the rate of 4% per year, forever. If the stock's required rate of return is 12%, what should the stock price be today? (3 pts) 2. Two investors are considering purchasing Lowe's Companies (LOW) common stock. They agree on the expected values of Div1 ($1.60) and the expected future dividend growth rate (3%). They also agree on the riskiness of the stock and, thus, on the discount rate (required rate of return) of 5%. Assume that the first investor would plan to sell the stock after 2 years and the second investor would plan on selling the stock after 5 years. Would they agree on today's price of the stock, or would they disagree on the price of the stock because of the differences in the two anticipated holding periods? Clearly explain your answer. (3 pts) 3. The Matador Restoration Co. is facing continually decreasing revenues due to the ever-shrinking population of people who want to restore vintage AMC Matadors. Based on the most recent earnings forecasts, management anticipates that dividends will decline at a rate of 11% perpetually. The firm just paid a dividend of $7.50 and the required return on the stock is 17%. (a) At what price should the stock sell today? (3 pts) (b) Calculate what the stock should sell for 5 years from now. (3 pts) 4. Three Floyds Brewery (3FB) is planning to pay its first dividend of $1.80/share one year from now. For the following four years, the dividend is projected to increase by 10%/year; thereafter, it will grow at a constant rate of 4%, forever. If the required rate of return (discount rate) on 3FB's stock is 15%, what should be the price of the stock today? (3 pts) 5. A share of preferred stock that you are considering is expected to pay a dividend of $4.86 each year, forever. Because the most recent dividend has just been paid, the next dividend payment will occur one year from now. If the required rate of return on the stock is 9%, what is a fair price for a share of this preferred stock? (3 pts) 6. The most recent dividend for Verizon's (VZ's) common stock was $2.31/share. As of early September, the stock was selling for $47.92/share. If investors expect the dividend to grow at a rate of 3.5% per year, what overall rate of return is the market expecting on the stock, as implied by the dividend-growth model? (3 pts) 7. Consider three bonds with maturities of 5, 10, and 15 years. Each bond has a coupon rate of 6% and sells at its face value of $1,000. Assume annual coupon payments. Use this information to answer the following questions: (a) What would be the market price of each bond if their yields to maturity (YTMs) were 4%? (3 pts) (b) What would be the market price of each bond if their YTMs were 8%? (3 pts) (c) Graph the relationship between bond prices and the YTMs for the 3 bonds. What conclusions can you draw regarding the relationship between time to maturity and the sensitivity of bond prices to changes in interest rates? (3 pts) 8. Dow Chemical Co. has bonds outstanding which are priced at $1,091.20 per bond. These bonds carry a coupon rate of 8.2%, make semi-annual payments, mature in 11 years, and have a par value is $1,000. What's the annual YTM on these bonds? (3 pts 1 9. Your aunt is trying to determine the value of her bond portfolio and asks you for help. Find the current market values of the components of your aunt's portfolio. (a) 75 bonds with a $1,000 face value and a coupon rate of 7.6%. These bonds have 11 years left to maturity and pay coupons on a semi-annual basis. The YTM of these bonds is 8.4%/year. What is the total market value of these 75 bonds? (3 pts) (b) 150 zero-coupon bonds with a $1,000 face value, 9 years to maturity, and a YTM of 7.7%/year (remember: use semi-annual compounding here). What is the total market value of these 150 zero-coupon bonds? (3 pts) 10. Adwan, Inc. (AI) stock has the following forecasted dividend-per share stream: $1.54 at the end of each of years 1 through 9 and $1.80 at the end of year 10, after which dividends are expected to grow by 2% per year, forever. Using a required return of 14%, calculate a fair price for AI's stock today. (3 pts) 11. A $1000-face-value bond issued by Jack-A-Roe Co. currently matures in 18 years, pays annual coupon payments at a coupon rate of 9%, and has a required return of 10% (per year). (a) Calculate a fair price for this bond today. (3 pts) (b) If you believe that, 3 years from now, the appropriate required return will still be 10%, calculate what the price should be 3 years from now. (3 pts) (c) If you believe that, 11 years from now, the appropriate required return will be still be 10%, calculate what the price should be 11 years from now. (3 pts) (d) If instead you believe that, 11 years from now, the appropriate required return will be 16%, calculate what the price should be 11 years from now. (3 pts) 12. You will find a final prospectus of a recent initial public offering (IPO) at this link: https://www.sec.gov/Archives/edgar/data/1564408/000119312517068848/d270216d424b4.htm. Find the following information related to the IPO: (a) The names of the two lead underwriters. (3 pts) (b) The names of the other investment banks in the underwriting syndicate. (3 pts) (c) The total proceeds from the offering that went to the company (i.e., these are the proceeds that came from issuing what are called \"primary shares\") (3 pts) (d) The total proceeds from the offering that went to selling shareholders (i.e., these are the proceeds that came from issuing what are called \"secondary shares\") (3 pts) (e) The percentage spread received by the underwriter for its services (calculated as ( Price Per Share Paid by Public - Price Per Share Paid by Underwriter ) / Price Per Share Paid by Public). (3 pts) 2