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
expand_more
expand_more
format_list_bulleted
Question
Chapter 7, Problem 7.12P
a.
Summary Introduction
To determine: The stock price if the required rate is 13.00%.
b.
Summary Introduction
To determine: The stock price if the required rate is 10.00%.
c.
Summary Introduction
To discuss: The impact of changing risk on share value.
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solution
Students have asked these similar questions
Over the past 6 years, Elk County Telephone has paid the dividends shown in the following table, The firm's dividend per share in 2023is expected to be $6.76.
a.If you can earn 15% on similar-risk investments, what is the most you would be willing to pay per share in 2022, just after the $6.62 dividend?
b. If you can earn only 12% on similar-risk investments, what is the most you would be willing to pay per share?
c. Compare your findings in parts a and b, what is the impact of changing risk on share value?
VI. Solve the following problems.
1. QRS Corporation has declared dividend for January 2019 of P20 per share and expected to
grow at a rate of 8% the following year and 7% on the succeeding year. Stockholders of QRS
Corporation expect a return of investment of 12%. Determine the value of a stock of QRS
Corporation.
Common stock value-Constant growth: Elk County Telephone has paid the dividends shown
in the following table over the past 6 years.
Year Dividend per share ($)
2012 2.87
2011 2.76
2010 2.60
2009 2.46
2008 2.37
2007 2.25
The firm's dividend per share next year is expected to be $3.02.
(i) If you can earn 13% on similar-risk investments, what is the most you would be
willing to pay per share?
(ii) If you can earn only 10% on similar-risk investments, what is the most you would be
willing to pay per share?
(iii) Compare and contrast your findings in parts a and b, and discuss the impact of
changing risk on share value.
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
Knowledge Booster
Similar questions
- Assume that the required return for Four Season's stock is 12 percent, and the company has paid the following dividends. Under the constant growth model valuation, what is the value of Four Season's stock? Year Dividend per share 2020 $1.32 2019 $1.21 2018 $1.16 2017 $1.12 a. $21.82 b. $11.00 c. $15.11 d. $19.80arrow_forwardProblem . Valuation of equity X Company paid dividends of 2.12 in 2022. The dividends are expected to grow at 5%per year in the long term and the company has a cost of equity of 9.40%. What is the value per equity share?arrow_forwardCALCULATING THE WACC Here is the condensed 2019 balance sheet for Skye Computer Company (in thousands of dollars): Skyes earnings per share last year were 3.20. The common stock sells for 55.00. last years dividend (D0) was 2.10, and a flotation cost of 10% would be required to sell new common stock. Security analysts are projecting that the common dividend will grow at an annual rate of 9%. Skyes preferred stock pays a dividend of 3.30 per share, and its preferred stock sells for 30.00 per share. The firms before-lax cost of debt is 10%, and its marginal tax rate is 25%. The firms currently outstanding 10% annual coupon rate, long-term debt sells at par value. The market risk premium is 5%, the risk-free rate is 6%, and Skyes beta is 1.516. The firms total debt, which is the sum of the companys short-term debt and long-term debt, equals 1.2 million. a. Calculate the cost of each capital component, that is, the after-tax cost of debt, the cost of preferred stock, the cost of equity from retained earnings, and the cost of newly issued common stock. Use the DCF method to find the cost of common equity. b. Now calculate the cost of common equity from retained earnings, using the CAPM method. c. What is the cost of new common stock based on the CAPM? (Hint: Find the difference between r1 and rs as determined by the DCF method, and add that differential to the CAPM value for rs.) d. If Skye continues to use the same market-value capital structure, what is the firms WACC assuming that (1) it uses only retained earnings for equity and (2) if it expands so rapidly that it must issue new common stock?arrow_forward
- A firm's common stock is currently selling for $50 per share. Its dividend payments and end of year stock prices, in each of the past 6 years are shown in the following table: 3. Year Dividends Year end Stock Price 2020 $4.60 47.5 2019 4.20 45.6 2018 3.80 43.4 2017 3.40 44.1 2016 3.10 39.1 2015 2.85 30.1 To help you analyze better, additional information is also collected which are as follows: Current Yields on 3-month U.S. Treasuries is 3.59% Return on market portfolio is estimated around 8% Beta coefficient is estimated to be 1.25 The dividends are expected to grow at a constant rate. Is this stock overvalued or undervalued? Support your answer with relevant calculations and arguments.arrow_forwardA firm's common stock is currently selling for $50 per share. Its dividend payments and end of year stock prices, in each of the past 6 years are shown in the following table: 1. Year Dividends Year end Stock Price 2020 $4.60 47.5 2019 4.20 45.6 2018 3.80 43.4 2017 3.40 44.1 2016 3.10 39.1 2015 2.85 30.1 To help you analyze better, additional information is also collected which are as follows: Current Yields on 3-month U.S. Treasuries is 3.59% Return on market portfolio is estimated around 8% • Beta coefficient is estimated to be 1.25 The dividends are expected to grow at a constant rate. Is this stock overvalued or undervalued? Support your answer with relevant calculations and arguments.arrow_forward2.SAM Corporation expects the following dividend pattern over the next seven years: 2015 2016 2017 2018 2019 2020 2021 $1.00 $1.10 $1.21 $1.33 $1.46 What is the price of this stock today if an investor wants to earn a. 15%? b. 12%? $1.61 $1.80 0arrow_forward
- if a dividend in 2018 was $1.11 per share and in 2019 dividend was $1.15 per share What is the dividend growth rate? Select one: a. 1% b. 1.5 % c. 2% d. 3.6%arrow_forwardUse the historical dividend data below to calculate the constant growth rate, estimate the price of O'Brien Ltds’ common stock knowing that the investor has an 19% required rate of return. 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 $0.41 $0.48 $0.56 $0.65 $0.75 $0.88 $0.99 $1.10 $1.13 $1.39 Question 10Answer a. g= 17.50% and Price (P0) = $56.43 b. g= 14.04% and Price (P0) = $31.49 c. g= 27.4% and Price (P0) = $300.81 d. g= 14.53% and Price (P0) = $35.60arrow_forwardCommon stock value: Constant growth Seagate Technology is a global leader in data storage solutions and consistent dividend payer. From 2018 through 2022, Seagate paid the following per-share dividends: Year Dividend per share 2022 2021 2020 2019 2018 $2.56 2.22 1.88 1.19 1.56 Assume that the historical annual growth rate of Seagate dividends is an accurate estimate of the future constant annual dividend growth rate. Use a 20% required rate of return to find the value of Seagate's stock immediately after it paid its 2022 dividend of $2.56. The value of Seagate's stock is $. (Round to the nearest cent.)arrow_forward
- A firm has had the indicated earnings per share over the last three years. YEAR EPS 2019 3.00 2018 2.00 2017 1.00 If the firm's dividend policy was based on a constant payout ratio of 50%, determine the annual dividend for each year. If the firm's dividend policy was based on a fixed dollar payout policy of 50 cents per share plus an extra dividend equal to 75% of earnings per share above $1.00, determine the annual dividend for each year. B)Compare stock dividends and stock splits.arrow_forwardThe company expected to pay dividend of $4 at end of the coming year (December 2022). The historical growth pattern for dividends is as follows: Year Dividend per share ($) 2021 3.75 2020 3.50 2019 3.30 2018 3.15 2017 2.85 Compute the price of common stock for 31 December 2021, given that required rate of return is 16.22 percent.arrow_forwardCommon stock value: Constant growth Seagate Technology is a global leader in data storage solutions and a high-yield dividend payer. From 2015 through 2019, Seagate paid the following per-share dividends: Year Dividend per share 2019 2018 2017 2016 2015 Assume that the historical annual growth rate of Seagate dividends is an accurate estimate of the future constant annual dividend growth rate. Use a 21% required rate of return to find the value of Seagate's stock immediately after it paid its 2019 dividend of $2.49. $2.49 2.26 1.87 1.23 1.49 The value of Seagate's stock is $. (Round to the nearest cent.) Carrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
Fundamentals Of Financial Management, Concise Edi...FinanceISBN:9781337902571Author:Eugene F. Brigham, Joel F. HoustonPublisher:Cengage Learning
Fundamentals Of Financial Management, Concise Edi...
Finance
ISBN:9781337902571
Author:Eugene F. Brigham, Joel F. Houston
Publisher:Cengage Learning