Professional Documents
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a. Continuing the present strategy will result in the expected growth rate and
required rate of return stated above.
b. Expanding timber holdings and sales will increase the expected dividend
growth rate to 11 percent but will increase the risk of the company. As a
result, the rate of return required by investors will increase to 16 percent.
c. Integrating into retail stores will increase the dividend growth rate to 10
percent and increase the required rate of return to 14 percent.
From the standpoint of market price per share, which strategy is best?
7. A share of preferred stock for the Buford Pusser Baseball Bat Company just
sold for $100 and carries an $8 annual dividend.
a. What is the yield on this stock?
b. Now assume that this stock has a call price of $110 in five years, when the
company intends to call the issue. (Note: The preferred stock in this case
should not be treated as a perpetual it will be bought back in five years for
$110.) What is this preferred stocks yield to call?
8. Waynes Steaks, Inc., has a 9 percent, noncallable, $100-par-value preferred
stock issue outstanding. On January 1 the market price per share is $73.
Dividends are paid annually on December 31. If you require a 12 percent
annual return on this investment, what is this stocks intrinsic value to you (on
a per share basis) on January 1?
9. The 9-percent-coupon-rate bonds of the Melbourne Mining Company have
exactly 15 years remaining to maturity. The current market value of one of
these $1,000-parvalue bonds is $700. Interest is paid semiannually. Melanie
Gibson places a nominal annual required rate of return of 14 percent on these
bonds. What dollar intrinsic value should Melanie place on one of these bonds
(assuming semiannual discounting)?
10. Just today, Fawlty Foods, Inc.s common stock paid a $1.40 annual
dividend per share and had a closing price of $21. Assume that the markets
bond feature is the same as for the Red Frog bonds, except that Old Chicagos
bonds mature in exactly 15 years. Now, assume that the markets nominal
annual required rate of return for both bond issues suddenly fell from 9
percent to 8 percent.
a. Which brewerys bonds would show the greatest price change? Why?
b. At the markets new, lower required rate of return for these bonds, determine
the per bond price for each brewerys bonds. Which bonds price increased
the most, and by how much?
14. Burp-Cola Company just finished making an annual dividend payment of
$2 per share on its common stock. Its common stock dividend has been
growing at an annual rate of 10 percent. Kelly Scott requires a 16 percent
annual return on this stock. What intrinsic value should Kelly place on one
share of Burp-Cola common stock under the following three situations?
a. Dividends are expected to continue growing at a constant 10 percent annual
rate.
b. The annual dividend growth rate is expected to decrease to 9 percent and to
remain constant at that level.
c. The annual dividend growth rate is expected to increase to 11 percent and to
remain constant at the level.