## Stocks and Stock Valuation Exercises

Complete these exercises and problems and then check your work.

### Exercises

**Question 1**

How does the application of the three-step valuation process differ for stocks vs. bonds?

**Question 2**

Explain the difference between par value, book value, and market value for a common stock. Which is most important and why?

**Question 3**

What rights are granted to stockholders? Explain each.

**Question 4**

According to the stock pricing models we use in class, will I pay more for a stock that I plan to hold for 5 years than I will for a stock that I plan to hold for 2 years?

**Question 5**

In the Non-Constant (Supernormal) Growth model, we assume that dividends will grow at a constant rate forever after the non-constant growth period. Is this realistic? If not, why do we do so?

**Question 6**

What is meant by market efficiency? What are the three types of market efficiency?

**Question 7**

I carefully analyze the WSJ and other sources of publicly available financial information (annual reports, CNBC, Business Week, etc.). Over the past 10 years, I have earned a 13% average annual rate of return (without facing higher than average risk levels), while the overall stock market has earned a 9.5% average annual rate of return. Is this evidence in favor of or against semi-strong form market efficiency?

**Question 8**

Why are efficient markets considered a good thing?

**Question 9**

Why might we expect markets to be efficient? Why might we expect markets to NOT be efficient?

**Problem 1**

You have a preferred stock with an $80 par value. The stock has a required return of 7% and the dividend is 6% of par value. How much should you pay for this stock?

**Problem 2**

Stock A has an expected dividend (D1) of $3.50. The growth rate in dividends (g) is 4% and the required return is 13%. What is the price of this stock?

**Problem 3**

Stock C just paid a dividend (D0) of $2. The required return is 12%. Find the price of the stock when the growth rates are

3a. 0%

3b. 5%

3c. 10%

3d. 15%,

3e. Does your answer seem reasonable? Explain.

**Problem 4**

Price a supernormal (nonconstant) growth stock with the following information:

Current Dividend (D0) is $3.00

growth rate year 1 is 35%

growth rate year 2 is 25%

growth rate year 3 is 20%

growth rate years 4 through infinity is 10%

required return is 18%

**Problem 5**

Price a supernormal (nonconstant) growth stock with the following information:

Current Dividend (D0) is $1.50

growth rate year 1 is -10%

growth rate year 2 is 0%

growth rates years 3-4 are 20%

growth rate year 5 is 150%

growth rate years 6 through infinity is 3%

required return is 15%

**Problem 6**

If you planned to sell the stock described in Problem 5 immediately after the year 3 dividend was paid, how much would you expect to receive? (Assume the required returns and growth rates remain unchanged)

Source: Kevin Bracker, Fang Lin, Jennifer Pursley, https://businessfinanceessentials.pressbooks.com/chapter/chapter-5-stocks-and-stock-valuation/

This work is licensed under a Creative Commons Attribution-NonCommercial 4.0 License.