## 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/