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Part AThe dividend discount model assumes the value of a share of common stock is the present value of all future dividends. One year holding period Assume an investor wants to buy a stock, hold it for one year, and then sell it. The company earned $2.50 a share last year and paid a dividend of $1 a share. The company maintains a 40% payout ratio over time. Financial analysts suggest the firm will earn about $2.75 per share during the coming year and will raise its dividend to $1.10 per share. The risk free rate is 10% and the market risk premium is currently 4%. You project the sale price of this stock a year from now to be $22. · Estimate the value of this stock. · Would you buy this stock? Multiple holding period Assume the expected holding period is three years and you estimate the following dividend payments at the end of each year. Year 1 - $1.10 per share Year 2 - $1.20 per share Year 3 - $1/35 per share The risk free rate is 10% and the market risk premium is currently 4%. You project the sale price of this stock at the end of the period to be $34. · Estimate the value of this stock. · Would you buy this stock? Infinite period model with supernormal growth The Brown Company has a current dividend of $2 per share. The following are the expected annual growth rates for dividends. The required rate of return for the stock is 14%. Year 1-3: 25% Year 4-6: 20% Year 7-9: 15% Year 10 on: 9% · Estimate the value of this stock. Part B In contrast to various discounted cash-flow techniques that attempt to estimate a specific value for a stock based on its estimated growth rates and its discount rate, the relative valuation techniques implicitly contend that it is possible to determine the value of an economic entity (i.e., the market, an industry, or a company) by comparing it to similar entities on the basis of several relative ratios that compare its stock price to relevant variables that effect a stock's value, such as earnings, cash flow, book value and sales. Consider the following four approaches. 1. Earnings Multiplier Model Assume a stock has an expected dividend payout of 50%, a required rate of return of 12% and an expected growth rate for dividends of 9%. Current earnings are $2.00 per share and the expected growth rate for earnings is 9%. · Calculate the earnings multiplier and stock price Briefly explain the following methods (for and against) 2. Price/Cash Flow Ratio 3. Price/Book Value Ratio 4. Price/Sales Ratio Part CBent ltd has a bond issue that will mature to its $1000 par value in 12 years. It pays interest annually and has a coupon rate of 11%. a) Find the value of the bond if the required rate of return is · 11% · 15% · 8% b) Plot your finding on a set of required return (x-axis) and market value of bond (y-axis) c) Use your findings in parts a and bto discuss the relationship between the coupon interest rate on a bond and the required return and the market value of the bond relative to its par value. d) What possible reasons could cause the required rate to differ from the coupon interest rate Part D You are required to evaluate the risk and return of the following two assets - A and B individually and see how they might fit into a diversifiable portfolio. Equal halves would be shared between both assets if included in a portfolio Each asset's risk can be assessed in two ways: in isolation and as part the firm's diversified portfolio of assets. The risk-free rate is currently5%. Return data for assets A and B, 2001-2010 are as follows The market index is as follows: Required a) Calculate the annual rate of return for each asset in each of the 10 preceding years, and those values to find the average annual return for each asset over the 10-year period. b) Use the returns to find the standard deviation and the coefficient of variation of the returns for each asset over the 10-year period 2001-2010. c) Use your findings in questions a and b to evaluate and discuss the return and risk associated with each asset. Which asset appears to be preferable? Explain. d) Use the CAPM to find the required return for each asset. Compare this value with average annual returns calculated in question a. e) Calculate the portfolio return and standard deviation of a portfolio consisting of both stock A and Stock B f) Calculate the weights of the minimum variance portfolio. g) Calculate the weights of the optimal risky portfolio h) What recommendations would you make with regard to investing in either of the two assets or in a portfolio together?
Compute the percentage of the allowance for doubtful accounts to the accounts and notes receivable as of December 31, 2009, for The XYZ Corporation.
Ppaid $25,000 in premiums on a 20-year endowment policy on her life. The policy has a face value of $40,000. At age 60, Linda decides to collect the face value of the policy. In the year of collection, explain how much will Linda include in her ta..
Cost of goods sold for the year is $240,000. Evaluate what is the company's average days in inventory?
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From the data given compute the Break Even Point - Evaluate break-even point in terms of dollars
The risk-free rate is 4%. The expected market rate of return is 11%. If you expect stock X with a beta of .8 to offer a rate of return of 12 percent, then you should.
what minimum price would be acceptable? What qualitative factors should Big Al’s considered before agreeing to accept the special order?
Evaluation of net income from the change in stockholders' equity and find the net income for the year.
Calculate the total bond interest expense over the bonds’ life. Prepare a straight-line amortization table like Exhibit 10.11 for the bonds’ life.
How would concepts of utility, income, and substitution impact your purchases based on the rise in cost of carbonated beverages?
For each ratio, you should define the ratio, inform the directors about the change in the ratio from one year to the next, and discuss how this change impacts the company.
What effect do these types of leases have on balance sheet? Why would the use of these long - term leases make a company’s debt to equity ratio, interest coverage ratio.
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