Assignment # 3

Group Assignment
Due Date: 31st October 2024
1. The current dividend on an equity share of Pioneer Technology is Rs 3.00. Pioneer is expected to
enjoy an above-normal growth rate of 40 % for 5 years. Thereafter, the growth rate will fall and
stabilize at 12%. Equity investors require a return of 18% from Pioneer’s stock. What is the
intrinsic value of the equity share of Pioneer?
2. A security analyst has forecast the dividends of Hodges Enterprises for the next three years. His
forecast is: D1 = $1.50; D2 = $1.75; D3 = $2.20. He has also forecast a price in three years of $48.50.
The rate of return for similar-risk common stock is 14%. What is the value of Hodges common
stock?
3. TTK Corp. preferred stock pays a $10 annual dividend per share. What is the price of a share of
TTK preferred if similar-risk preferred yields 8%? If the price of comparable preferred yields 11%?
4. A share of preferred stock with a $12 annual dividend is selling for $75. What is the required rate of
return for the preferred stock?
5. The current price of a stock (P0) is $20 and last year's price (P-1) was $18.87. The latest dividend
(D0) is $2. Assume a constant growth rate (g) in dividends and stock price. What is the stock's
return for the coming year?
6. The current year's dividend (D0) for a share of common stock is $2 and the current price (P 0) of the
stock is $30. Dividends are expected to grow at 5% forever. What is the rate of return for this stock?
7. A company pays a current dividend (D0) of $1.20 per share on its common stock. The annual
dividend will increase by 3%, 4% and 5%, respectively, over the next three years, and by 6% per
year thereafter. The appropriate discount rate is 12%. What is P0?
8. Melvin Matrix, Inc. just paid a $7.50 annual dividend on its preferred stock. If the dividend yield
on the stock is 8.5 percent, what is the current price?
9. Llano’s stock is currently selling for $40.00. The expected dividend one year from now is $2 and
the required return is 13%. What is this firm’s dividend growth rate assuming the constant
dividend growth model is appropriate?
10. Auburn, Inc. just paid a $1.25 dividend, which analysts believe will increase at a constant rate of
6 percent. The stock currently sells for $20. What is the required rate of return?
11. Ewald Company’s current stock price is $36, and its last dividend was $2.40. in view of Ewald’s
strong financial position and its consequent low risk, its required rate of return is only 12 percent.
if dividends are expected to grow at a constant rate, g, in the future, and if k e is the expected to
remain at 12 percent, what is Ewald’s expected stock price 5 years from now?
12. Spacely Sprockets just paid a $1 dividend. You expect the dividend will grow at 15 percent for
the next two years, followed by annual growth rates of 12 percent, 10 percent, and 8 percent.
After that, you expect dividends will growth at 6 percent for the foreseeable future. If the market
requires 13 percent on stocks of this risk, what is the current value of Spacely Sprockets stock?
What will be the value of the stock today? What is the value of the stock after 2 years?
13. XYZ limited’s earnings and dividends have been growing at a rate of 18 % per annum. This
growth rate is expected to continue for 4 years. After that the growth rate will fall to 12 % for the
next 4 years. Thereafter, the growth rate is expected to be 6 % forever. If the last dividend per
share was Rs 2.00 and the investors required rate of return on XYZ’s equity is 15 %.
a. What is the intrinsic value per share?
b. Calculate P1, P2, P3 and P4.
c. Calculate the dividend yield and capital gain yield for the year 1,2 and 3.
14. Synder Computer Chips Inc. is experiencing a period of rapid growth. Earnings and dividends are
expected to grow at a rate of 15 percent during the next 2 years, at 13 percent in the third year.
And at a constant rate of 6 percent thereafter. Synder’s last dividend was $1.15, and the current
value of the stock is $32.08. What is the required rate of return for the investor of Synder
Computer Chips?
15. Simpkins Company is expanding rapidly, and it currently needs to retain all of its earnings; hence
it does not pay any dividends. However, investors expect Simpkins to begin paying dividends,
with the first dividend of $1.00 coming 3 years from today. The dividends should grow rapidly –
at a rate of 50% per year – during years 4 and 5. After year 5, the company should grow at a
constant rate of 8% per year. If the required rate of return on stock is 15%, what is the value of
the stock today?
16. Rolen Riders issued preferred stock with a stated dividend of 10% of par. Preferred stock of this
type currently yields 8%, and the par value is $100. Assume dividends are paid annually.
a. What is the value of Rolen’s preferred stock?
b. Suppose interest rate levels rise to the point where the preferred stock now yields 12%.
What would be the value of Rolen’s preferred stock?
17. Taussig Technologies Corporation (TTC) has been growing at a rate of 20% per year in recent
years. This same growth rate is expected to last for another 2 years.
a. If D0=$1.60, ke=10%, gn=6%, what is TTC’s stock worth today? What are its expected
dividend yield and capital gain yield at this time?
b. Now assume that TTC’s period of supernormal growth is to last another 5 years rather
than 2 years. How would this affect its price, dividend yield and capital gain yield?
18. Callaghan Motors’ bonds have 10 years remaining to maturity. Interest is paid annually, the
bonds have a $1,000 par value, and the coupon interest rate is 8 percent. The bonds have a yield
to maturity of 9 percent. What is the current market price of these bonds?
19. Wilson Wonders’ bonds have 12 years remaining to maturity. Interest is paid annually, the bonds
have a $1,000 par value, and the coupon interest rate is 10 percent. The bonds sell at a price of
$850. What is their yield to maturity?
20. Thatcher Corporation’s bonds will mature in 10 years. The bonds have a face value of $1,000 and
an 8 percent coupon rate, paid semiannually. The price of the bonds is $1,100. The bonds are
callable in 5 years at a call price of $1,050. What is the yield to maturity? What is the yield to
call?
21. Heath Foods’ bonds have 7 years remaining to maturity. The bonds have a face value of $1,000
and a yield to maturity of 8 percent. They pay interest annually and have a 9 percent coupon rate.
What is their current yield?
22. The Garraty Company has two bond issues outstanding. Both bonds pay $100 annual interest plus
$1,000 at maturity. Bond L has a maturity of 15 years, and Bond S a maturity of 1 year.
a. What will be the value of each of these bonds when the going rate of interest is (1)5
percent, (2) 8 percent, and (3) 12 percent? Assume that there is only one more interest
payment to be made on Bond S.
b. Why does the longer-term (15-year) bond fluctuate more when interest rates change than
does the shorter-term bond (1-year)?
23. A 10-year, 12 percent semiannual coupon bond, with a par value of $1,000, may be called in 4
years at a call price of $1,060. The bond sells for $1,100. (Assume that the bond has just been
issued.)
a. What is the bond’s yield to maturity?
b. What is the bond’s current yield?
c. What is the bond’s capital gain or loss yield?
d. What is the bond’s yield to call?
24. A bond that matures in 7 years sells for $1,020. The bond has a face value of $1,000 and a yield
to maturity of 10.5883 percent. The bond pays coupons semiannually. What is the bond’s current
yield?
25. Suppose Ford Motor Company sold an issue of bonds with a 10-year maturity, a $1,000 par
value, a 10 percent coupon rate, and semiannual interest payments.
a. Two years after the bonds were issued, the going rate of interest on bonds such as these
fell to 6 percent. At what price would the bonds sell?
b. Suppose that, 2 years after the initial offering, the going interest rate had risen to 12
percent. At what price would the bonds sell?
c. Suppose that the conditions in part a existed—that is, interest rates fell to 6 percent 2
years after the issue date. Suppose further that the interest rate remained at 6 percent for
the next 8 years. What would happen to the price of the Ford Motor Company bonds over
time?