Gitman: Principl Manageri Finance_15 (15th Edition) (What's New in Finance)
15th Edition
ISBN: 9780134476315
Author: Chad J. Zutter, Scott B. Smart
Publisher: PEARSON
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Question
Chapter 7, Problem 7.1STP
a.
Summary Introduction
To determine: The value of the common stock if the growth rate is 0.00% to infinity.
a.
Expert Solution
Answer to Problem 7.1STP
The value of the common stock if the growth rate is 0.00% to infinity is $15.00.
Explanation of Solution
Given information:
Required rate: 12.00%
Annual dividend: $1.80
Formula used to calculate the stock price if the growth rate is 0.00% to infinity.
Calculation of the stock price:
Therefore, the stock price is $15.00.
b.
Summary Introduction
To determine: The value of the common stock if the growth rate is 5.00% to infinity.
b.
Expert Solution
Answer to Problem 7.1STP
The value of the common stock if the growth rate is 5.00% to infinity is $27.00.
Explanation of Solution
Given information:
Required rate: 12.00%
Annual dividend: $1.80
Growth rate: 5.00%
Formula used to calculate the stock price
Calculation of the stock price if the growth rate is 5.00% to infinity:
Therefore, stock price is $27.00.
b.
Summary Introduction
To determine: The stock price if expected to grow at an annual rate of 5% for each of the next 3 years, followed by a constant annual growth rate of 4% in year 4 to infinity.
b.
Expert Solution
Answer to Problem 7.1STP
The stock price if expected to grow at an annual rate of 5% for each of the next 3 years, followed by a constant annual growth rate of 4% in year 4 to infinity is $24.03.
Explanation of Solution
Calculation of the stock price:
Excel working:
Therefore, stock price is $24.03.
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Question content area top
Part 1
(Common stock valuation) Assume the following:
•
the investor's required rate of return is
14.5
percent,
•
the expected level of earnings at the end of this year
(E1)
is
$6,
•
the retention ratio is
40
percent,
•
the return on equity
(ROE)
is
14
percent (that is, it can earn
14
percent on reinvested earnings), and
•
similar shares of stock sell at multiples of
6.742
times earnings per share.
Questions:
a. Determine the expected growth rate for dividends.
b. Determine the price earnings ratio
(P/E1).
c. What is the stock price using the P/E ratio valuation method?
d. What is the stock price using the dividend discount model?
e. What would happen to the P/E ratio
(P/E1)
and stock price if the company increased its retention rate to
80
percent (holding all else constant)? What would happen to the P/E ratio
(P/E1)
and stock price if the company paid out all its earnings in the form of dividends?…
Homework Financial Markets.pdf X
1/ 2
100%
Exam Financial Markets
1. An investor expects to purchase common stocks today and sell them after three years. The
investor has estimated dividends for the next three years, D,, D, and D, and the selling price of
the stock three years from now, P3. According to the dividend discount model, the intrinsic value
of the stock today is the present value of:
a) next year's dividend, D.
b) future expected dividends, D, and D2
c) future expected dividends, D,, D2 and D3
d) future expected dividends and price, D., D2, and P2
e) future expected dividends and price, D, D, D, and P,
Chapter 7 Solutions
Gitman: Principl Manageri Finance_15 (15th Edition) (What's New in Finance)
Ch. 7.1 - What are the key differences between debt and...Ch. 7.2 - What risks do common stockholders take that other...Ch. 7.2 - Prob. 7.3RQCh. 7.2 - Explain the relationships among authorized shares,...Ch. 7.2 - Prob. 7.5RQCh. 7.2 - Prob. 7.6RQCh. 7.2 - Explain the cumulative feature of preferred stock....Ch. 7.3 - Describe the events that occur in an efficient...Ch. 7.3 - Prob. 7.9RQCh. 7.3 - Describe, compare, and contrast the following...
Ch. 7.3 - Describe the free cash flow valuation model, and...Ch. 7.3 - Explain each of the three other approaches to...Ch. 7.4 - Prob. 7.13RQCh. 7.4 - Assuming that all other variables remain...Ch. 7 - Prob. 7.1STPCh. 7 - Learning Goal 5 ST7-2 Free cash flow valuation...Ch. 7 - Prob. 7.1WUECh. 7 - Prob. 7.2WUECh. 7 - Prob. 7.3WUECh. 7 - Prob. 7.4WUECh. 7 - Prob. 7.5WUECh. 7 - Prob. 7.6WUECh. 7 - Authorized and available shares Aspin...Ch. 7 - Preferred dividends Acura Labs Inc. has an...Ch. 7 - Learning Goal 2 P7-3 Preferred dividends In each...Ch. 7 - Learning Goal 2 P7-4 Convertible preferred stock...Ch. 7 - Learning Goal 4 P7-5 Preferred stock valuation TXS...Ch. 7 - Prob. 7.6PCh. 7 - Preferred stock valuation Jones Design wishes to...Ch. 7 - Learning Goal 4 P7-8 Common stock value: Constant...Ch. 7 - Common stock value: Constant growth McCracken...Ch. 7 - Learning Goal 4 P7- 11 Common stock value:...Ch. 7 - Prob. 7.12PCh. 7 - Prob. 7.13PCh. 7 - Learning Goal 4 P7-14 Common stock value: Variable...Ch. 7 - Prob. 7.15PCh. 7 - Prob. 7.16PCh. 7 - Learning Goal 5 P7-17 Free cash flow valuation...Ch. 7 - Prob. 7.20PCh. 7 - Prob. 7.21PCh. 7 - Prob. 7.22PCh. 7 - Prob. 7.23PCh. 7 - Integrative: Risk and valuation Hamlin Steel...Ch. 7 - Prob. 7.25P
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