Chapter11TheStockMarket83

Quantitative Problems Chapter 11

Ebay,Inc.wentpublicinSeptemberof1998.Thefollowinginformationonsharesoutstandingwaslisted
inthefinalprospectusfiledwiththeSEC1.
IntheIPO,theEbayissued3,500,000newshares.Theinitialpricetothepublicwas$18.00pershare.The
finalfirstdayclosingpricewas$44.88.
1.

Iftheinvestmentbankersretained$1.26pershareasfees,whatwasthenetproceedstoEbay?What
wasthemarketcapitalizationofnewsharesofEbay?
Solution: NetProceedstoEbay(18.001.26)3,500,000$58,590,000.00
MarketCap44.883,500,000157,080,000

2.

TwocommonstatisticsinIPOsareunderpricingandmoneyleftonthetable.Underpricingisdefined
aspercentagechangebetweentheofferingpriceandthefirstdayclosingprice.Moneyleftonthe
tableisthedifferencebetweenthefirstdayclosingpriceandtheofferingprice,multipliedbythe
numberofsharesoffered.CalculatedtheunderpricingandmoneyleftonthetableforEbay.What
doesthissuggestabouttheefficiencyoftheIPOprocess?
Solution: Underpricing((44.8818.00)/18.00)149.33%
MLOT(44.8818.00)3,500,000$94,080,000

3.

ThesharesofMisheak,Inc.areexpectedtogeneratedthefollowingpossiblereturnsoverthenext12
months:
Return
5%
5%
10%
15%
25%

Probability
0.10
0.25
0.30
0.25
0.10

Ifthestockiscurrentlytradingat$25/share,whatistheexpectedpriceinoneyear.Assumethatthe
stockpaysnodividends.
Solution: Theexpectedreturnoverthenext12monthsiscalculatedas:
0.050.100.050.250.100.300.150.250.250.100.10
Thissuggeststhattheexpectedpriceis$25*(1.10)$27.50
4.

SupposeSoftPeople,Inc.issellingat$19.00andcurrentlypaysanannualdividendof$0.65per
share.Analystsprojectthatthestockwillbepricedaround$23.00inoneyear.Whatistheexpected
return?
Solution:
Expectedreturn

23.00 0.65 19.00

24.47%
19.00

Thisinformationissummarizedfromhttp://www.sec.gov/Archieves/edgar/data/1065088/000101287098002475.txt

Chapter11TheStockMarket84

5.

InSeptemberof2004,Microsoft,Inc.wastradingat$27.29pershare.Atthattime,Microsoftwas
payinganannualdividendof$0.32pershare,andanalystshadseta1yeartargetpricearound
$33.30pershare.Whatistheexpectedreturnonthisstock?
Solution:
Expectedreturn

6.

LaserAceissellingat$22.00pershare.Themostrecentannualdividendpaidwas$0.80.Usingthe
GordonGrowthmodel,ifthemarketrequiresareturnof11%,whatistheexpecteddividendgrowth
rateforLaserAcer?
Solution:
P0

7.

D0 (1 g)
0.80(1 g)
, or 22.00
. Solving, g 7.1%
ke g
0.11 g

HuskieMotorsjustpaidanannualdividendof$1.00pershare.Managementhaspromised
shareholderstoincreasedividendsaconstantrateof5%.Iftherequiredreturnis12%,whatisthe
currentpricepershare?
Solution:
P0

8.

33.30 0.32 27.29

0.2319 23.2%
27.29

D0 (1 g) 1.00(1 0.05)

$15.00
ke g
0.12 0.05

InSeptemberof2004,Microsoft,Inc.wastradingat$27.29pershare.Atthattime,Microsoftwas
payinganannualdividendof$0.32pershare,whichisdoubleits2003dividendof$0.16pershare.
Ifthistrendisexpectedtocontinue,whatistherequiredreturnonMicrosoft?
Solution:

D0 (1 g)
ke g
0.32(1 1)
27.29
, orke102%.
ke 1
Thisseemsabithigh.Perhapsinvestorsdontbelievethistrendwillcontinueforever,or
thisisntthecorrectvaluationmodelforMicrosoft!
P0

9.

Gordon&Co.sstockhasjustpaiditsannualdividend$1.10pershare.AnalystsbelievethatGordon
willmaintainitshistoricdividendgrowthrateof3%.Iftherequiredreturnis8%,whatisthe
expectedpriceofthestocknextyear?
Solution:
P1

D1 (1 g) 1.133(1.03)

$23.34
ke g
0.08 0.03

10. MacroSystemsjustpaidanannualdividendof$0.32pershare.Itsdividendisexpectedtodoublefor
thenextfouryears(D1throughD4),afterwhichitwillgrowatamoremodestpaceof1%peryear.If
therequiredreturnis13%,whatisthecurrentprice?
Solution:
P0

0.64 1.28 2.56 5.12 5.12(1 0.01)

1

$32.91
2
3
4
1.13 1.13 1.13 1.13
0.13 0.01 1.134

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11. NatTCatIndustriesjustwentpublic.Asagrowingfirm,itisnotexpectedtopayadividendforthe
firstfiveyears.Afterthat,investorsexpectNatTCattopayanannualdividend$1.00pershare
(i.e.,D61.00),withnogrowth.Iftherequiredreturnis10%,whatisthecurrentstockprice?
Solution:

D6 (1 g) 1.00(1.00)

$10.00
ke g
0.10 0.00
So,P0P5/(1.10)5$6.21
P5

12. AnalystsareprojectingthatCBRailwayswillhaveearningspershareof$3.90.Iftheaverage
industryratioisabout25,whatisthecurrentpriceofCBRailways?
Solution: Price3.9025$97.50
13. For2003,Microsoft,Inc.reportedearningspersharearound$0.75.IfMicrosoftisinanindustrywith
aratiorangingfrom30to40,whatisareasonablepricerangeforMicrosoft?
Solution: Microsoftspriceshouldbebetween$0.7530to$0.7540,or$22.50to$30.00.
14. Considerthefollowingsecurityinformationfor4securitiesmakingupanindex:
Price
Security time0
1
8
2
22
3
35
4
50

Shares
time1 Outstanding
13
20million
25
50million
30
120million
55
75million

Whatisthechangeinthevalueoftheindexfromtime0totime1iftheindexiscalculatedusing
avalueweightedarithmeticmean?
Solution: Foravalueweightedarithmeticmean,thechangeiscalculatedasfollows:
First,themarketvalueattime0iscalculatedas:
Security
1
2
3
4

Price
time0
time1
8
13
22
25
35
30
50
55

Shares
Outstanding
20million
50million
120million
75million

Market
Value
$160
$1,100
$4,200
$3,750
$9,210

Thechangeisthencalculatedas:
13 8 160 25 22 1100 30 35 4200 55 50 3750
8 9210 22 9210 35 9210 50 9210 0.0027

Index1Index01.0027

Chapter11TheStockMarket86

15. Anindexhadanaverage(geometric)meanreturnover20yearsof3.8861%.Ifthebeginningindex
valuewas100,whatwasthefinalindexvalueafter20years?
Answer: Theactualreturnoverthe20yearsis(1.038861)202.143625
So,thefinalindexvalueis214.3625
16. $1/(10.51)$20/(10.15)$18.26
17. 23$3.5$80.50.