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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Textbook Question
Chapter 7, Problem 7.5P
Learning Goal 4
P7-5 Preferred stock valuation TXS Manufacturing has an outstanding preferred stock issue with a par value of $65 per share. The preferred sl1ares pay dividends annually at a rate of 10%.
- a. What is the annual dividend on TXS preferred stock?
- b. If investors require a return of 8% on this stock and the next dividend is payable 1 year from now, what is the price of TXS preferred stock?
- c. Suppose that TXS has not paid dividends on its
preferred shares in the past 2 years, but investors believe it will start paying dividends again in 1 year. What is the value of TXS preferred stock if it is cumulative and if investors require an 8% rate of return?
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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,
Additional Activities
Perform what is being asked in the following:
1. What will you pay today for a stock that is expected to make a P 45.00
dividend in one year if the expected dividend rate is 5% and you require a 12%
return on your investment?
2. XYZ Company's preferred stock is selling for P 60.00 a share. If the required
return is 8%, what will the dividend be two years from now?
3. Your broker is trying to sell you a stock with a current market price of
P 2,160.00 The stock's last dividend was P 53.25, and earnings and
dividends are expected to increase at a constant growth rate of 10%. Is the
stock fairly valued if the return is 13%? Explain why or why not.
Stock value using PS ratio to estimate selling price
An investor is going to buy stock, collect dividend payments for five years, then sell the stock. The
investor demands a certain percent return on investment. Based on the following details, what is the
maximum price the investor should be willing to pay for this stock?
Scenario A common stock:
•
Dividend expected at end of first year = $1.00
Expected growth rate of dividends = 12% until end of year 5
-
Revenue $30 million at end of year 5
Shares outstanding = 1,000,000 shares
PS (Price to Sales) ratio expected at end of year 5 = 0.5 times
Required rate of return = 10%
O
Selling price =
-
at end of year 5
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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