Stocks and Stock Valuation Exercises
Complete these exercises and problems and then check your work.
Exercises
Question 1
Question 2
Question 4
Question 5
Question 6
Question 7
Question 8
Question 9
Problem 1
Problem 2
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%,
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%
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%
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)
How does the application of the three-step valuation process differ for stocks vs. bonds?
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.
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?
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?
What is meant by market efficiency? What are the three types of market efficiency?
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?
Why are efficient markets considered a good thing?
Why might we expect markets to be efficient? Why might we expect markets to NOT be efficient?
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?
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?
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.
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%
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%
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/
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