Bus 405 Week 2 Chapter 6 Common Stock Valuation

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This pack of BUS 405 Week 2 Chapter 6 Common Stock Valuation contains: 1. Which one of the following terms is used to identify the evaluation method that determines the value of a stock by reviewing a firm's financial statement in conjunction with other financial and economic information? 2. The method of valuing a stock based on the present value of the future income derived from that stock is called: 3. The model used to value a stock that pays a dividend which increases at a constant rate forever is referred to as which one of the following? Assume the growth rate is less than the discount rate. 4. How is a sustainable dividend growth rate defined? 5. The portion of net income that is held by a firm, for future growth, comprises which one of the following balance sheet accounts? 6. What is the percentage of a firm's earnings that is distributed to shareholders called? 7. What is the percentage of a firm's net income which is reinvested in the firm to support future growth called? 8. The model used to value the stock of a firm which has a short-term growth rate that varies from its long-term growth rate is called the _____ dividend growth model. 9. What is beta? 10. What is the accounting relationship in which earnings per share minus dividends equal the change in book value per share called? 11. The Free Cash Flow Model: I. can be used to value a company with negative earnings II. is based on a firm having positive cash flows III. requires that a firm pay a dividend IV. directly estimates a value for a firm's equity 12. What is the market value of a share of stock divided by the net income per share called? 13. The net income per share divided by the market price per share is called the: 14. Growth stocks are frequently described as having which one of the following characteristics? 15. The price-book ratio is computed as the market value per share divided by the per share book value of: 16. A firm's current stock price divided by the firm's revenue per share is referred to as which one of the following ratios? 17. An analysis of which of the following are commonly included as part of fundamental analysis? I. sales II. book value III. earnings per share IV. cash flow 18. Based on the dividend discount model, an increase in which of the following will lower the current value of a stock? I. amount of the next dividend II. dividend growth rate III. discount rate 19. The dividend discount model assumes that: 20. The constant perpetual growth model assumes the: 21. The constant perpetual growth model is applicable primarily to those firms which: 22. Which one of the following is a correct formula for computing a geometric average dividend growth rate? 23. The arithmetic average dividend growth rate is: 24. The retention ratio is the: 25. An increase in the retention ratio will: 26. A decrease in which one of the following will increase a firm's sustainable rate of growth? 27. The sustainable growth rate is equal to: 28. Hypo Tech expects its net income to grow at 20 percent a year for the next two years and then taper off to a constant 5 percent annual rate of growth. The firm maintains a constant dividend payout ratio. Which one of the following models is best suited for computing the current value of this firm's stock? 29. Which one of the following is a requirement of the two-stage dividend growth model? 30. Which one of the following statements concerning beta is correct? 31. Which one of the following is correct concerning the two-stage dividend growth model? 32. How will the price of a stock be affected if the dividend growth rate is decreased? 33. Which one of the following will increase the current residual income of a firm? 34. Which one of the following models can be used to value the stock of a firm that maintains a one hundred percent retention ratio? 35. Which of the following have the same meaning as the term "economic value added"? I. abnormal earnings II. residual income III. value created by a firm in period t IV. EPSt - Bt-1 ? k 36. Which one of the following correctly expresses the clean surplus relationship? 37. Which one of the following statements related to the price-earnings (P/E) ratio is correct? 38. Which one of the following is used as an indicator that a firm has good-quality earnings? 39. Which one of the following is the most common definition of cash flow as used in the price-cash flow ratio? 40. The price-sales ratio helps measure the ability of a firm to generate: 41. You would like to know the value of a firm's equity today in relation to the cost of that equity. Which one of the following ratios will provide you with this information? 42. PT Boats plans to pay a $2.40 a share dividend at the end of each of the next 2 years. At the end of year 3, it will pay a final liquidating dividend of $12 a share. After that, the company plans to close its doors permanently. What is the current value of this stock at a discount rate of 16 percent? 43. Upwind Tours just announced that it will pay an annual dividend of $3.60 a share one year from now. Two years from now, the company expects to pay a $28 a share liquidating dividend. After that, the company will cease operations. What is the current value per share at a discount rate of 12.5 percent? 44. Lakeside Sheet Metal is downsizing and plans on completely closing 3 years from now. The firm's liquidation plan calls for annual dividends of $2, $4, and $35 over the next 3 years, respectively. What is the current value of this stock given a discount rate of 14 percent? 45. Barn Wood Interiors announced today that it is going out of business. As of today, no more regular dividends will be paid. The firm will, however, pay two liquidating dividends. The first will be paid one year from now in the amount of $14 a share. The second and final payment will be paid two years from now at an estimated $38 a share. What is the value of this stock today at a discount rate of 18.7 percent? 46. Blue Water Tours just paid an annual dividend of $0.72 a share. The firm has a policy of increasing the dividend by 3.0 percent annually. What is the current value of this stock at a discount rate of 11.7 percent? 47. Precision Engineering recently announced that its next annual dividend will be $1.20 per share with later dividends increasing by 2.5 percent annually. What is the current value of this stock to you if you require a 12 percent rate of return? 48. The Fish House increases its dividend each year. The next annual dividend is expected to be $2.21 a share. Future dividends will increase by 3.5 percent annually. What is the current value of this stock if the discount rate is 12 percent? 49. Long Life Floors just paid an annual dividend of $0.82 a share and plans on increasing future dividends by 2 percent annually. The discount rate is 15 percent. What will the value of this stock be 5 years from today? 50. Wilson's Furniture is experiencing good growth so has decided to commence paying dividends starting next year. The first dividend will be $0.50 a share with annual increases of 4 percent in the dividend amount. The discount rate is 11 percent. What will the value of this stock be three years from now? 51. The Back Room just paid an annual dividend of $1.65 a share. The firm expects to pay dividends forever and to increase the dividend by 3 percent annually. What is the expected value of this stock five years from now if the discount rate is 14 percent? 52. Main Street Antiques is planning on paying an annual dividend of $2.60 per share next year. The company is slowly downsizing and is decreasing its dividend by 2 percent annually. What is the current value of this stock at a discount rate of 12 percent? 53. You are considering buying shares of stock in the Steel Mill. The forecast for the firm is steady growth over the next decade. The firm just paid its annual dividend of $1.42 per share and has plans to increase that amount by 4 percent annually indefinitely. You require a 12.5 percent return on this type of security. What is your estimate of the value of this stock ten years from now? 54. DT Industries stock is valued at $9.60 a share. The firm pays annual dividends at an increasing rate of 2 percent annually. Next year's dividend will be $1.50 per share. What is the required return on this stock? 55. Wholesale Foods common stock is valued at $11.05 per share. The firm pays annual dividends which increase at a constant rate. The last dividend paid was $1.20. The required return is 12 percent. What is the dividend growth rate? 56. A stock sells for $14.85 a share and has a required return of 14 percent. Dividends are paid annually and increase at a constant 3 percent per year. What is the amount of the last dividend paid? 57. Factory Stores pays annual dividends and increases those dividends by 2 percent each year. The stock is currently valued at $12 a share and has a required return of 16 percent. You own 400 shares of this stock. What is the total amount of dividend income you should expect to receive next year? 58. The common stock of JL Recyclers has a required return of 14 percent and a current value of $18.72. The company pays its dividend annually and increases the amount by 4 percent each year. You own 200 shares of this stock. What was the total amount of the last dividend you received? 59. The Rug Barn has paid annual dividends of $1.30, $1.36, $1.40, $1.42, and $1.45 over the last 5 years, respectively. What is the geometric average dividend growth rate? 60. A firm has paid annual dividends of $1.45, $1.53, $1.55, $1.60, $1.62, and $1.66 per share over the past 6 years, respectively. What is the geometric average growth rate for these dividends? 61. Over the past 5 years, DL Insulation has paid annual dividends of $1.40, $1.55, $1.70, $1.73, and $1.77 per share. What is the geometric average dividend growth rate for this period? 62. The Brown Jug has paid annual dividends of $0.61, $0.65, $0.70, $0.80, and $0.88 per share over the past 5 years, respectively. What is the geometric average dividend growth rate for this period? 63. Dennison Mfg. pays annual dividends. For the past six years, the firm has paid dividends of $1.10, $1.12, $1.25, $1.28, $1.30, and $1.40, respectively. What is the geometric average dividend growth rate for this time period? 64. Over the past 4 years, a local firm has paid annual dividends of $1.62, $1.65, $1.70, and $1.74. What is the arithmetic average dividend growth rate? 65. Blue Water Tours has paid annual dividends of $2.10, $2.12, $2.15, $2.15, and $2.22 over the past 5 years, respectively. What is the arithmetic average growth rate for these dividends? 66. Knit

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Business - General Business Week One Week 1 – DQ1 - Blume’s Formula, Allocation, and Selection From Chapter 1, answer Concept Question 5: What is Blume’s formula? When would you want to use it in practice? Also, from Chapter 2, answer Concept Question 4: What is the difference between asset allocation and security selection? Remember to complete all parts of the questions and support your answers with examples from the text and other resources. Week 1 – DQ2 - Money Market Funds From Chapter 4, complete Problem 4: The Aqua Liquid Assets Money Market Mutual Fund has a NAV of $1 per share. During the year, the assets held by this fund appreciated by 2.5 percent. If you had invested $50,000 in this fund at the start of the year, how many shares would you own at the end of the year? What will the NAV of this fund be at the end of the year? Why? Remember to complete all parts of the question, show your work, and report the results of your analysis. Assignment Week 1- Assignment - Annualized Returns – Chapter 3 problem 18 Complete problem 18 in Chapter 3 (shown below) and submit to the instructor. Show your work to find the annualized return for each of the listed share prices. Write a 100 word analysis of the process to calculate these annualized returns. Suppose you have $28,000 to invest. You’re considering Miller-Moore Equine Enterprises (MMEE), which is currently selling for $40 per share. You also notice that a call option with a $40 strike price and six months to maturity is available. The premium is $4.00. MMEE pays no dividends. What is your annualized return from these two investments if, in six months, MMEE is selling for $48 per share? What about $36 per share? Week Two Readings Chapter 5: The Stock Market Chapter 6: Common Stock Valuation Chapter 7: Stock Price Behavior and Market Efficiency Chapter 8: Behavioral Finance and the Psychology of Investing Discussions Week 2 – DQ1 - Primary and Secondary Markets Complete Concept Question 1 from Chapter 5: If you were to visit your local Chevrolet retailer, there is both a primary and a secondary market in action. Explain. Is the Chevy retailer a dealer or a broker? Remember to complete all parts of the question and support your answers with examples from the text and other resources. Week 2 – DQ2 - Contrarian Investing Complete Concept Question 9 from Chapter 8: What does it mean to be a contrarian investor? How would a contrarian investor use technical analysis? Post your answers to the discussion board. Remember to complete all parts of the question and support your answers with examples from the text and other resources. Assignment Week 2 – Assignment - Abbott Laboratories Problem After reading the Value Line figures and information on Abbott Laboratories in the Questions and Problems section of Chapter 6 (just before Problem 27), complete Problems 27, 28, 29, 30, and 31 and submit to your instructor. Show your calculations and in your response to problem 31 write a 100 to 200 word defense of your position as to the value of Abbott Laboratories stock at its current price of $50 per share. 27. What is the sustainable growth rate and required return for Abbott Laboratories? Using these values, calculate the 2010 share price of Abbott Laboratories Industries stock according to the constant dividend growth model. 28. Using the P/E, P/CF, and P/S ratios, estimate the 2010 share price for Abbott Laboratories. Use the average stock price each year to calculate the price ratios. 29. Assume the sustainable growth rate and required return you calculated in Problem 27 are valid. Use the clean surplus relationship to calculate the share price for Abbott Laboratories with the residual income model. 30. Use the information from the previous problem and calculate the stock price with the clean surplus dividend. Do you get the same stock price as in the previous problem? Why or why not? 31. Given your answers in the previous questions, do you feel Abbott Laboratories is overvalued or undervalued at its current price of around $50? At what price do you feel the stock should sell? Week Three Discussions Week 3 – DQ1 - Forward Interest Rates Complete Problem 16 from the Questions and Problems section of Chapter 9: According to the pure expectations theory of interest rates, how much do you expect to pay for a one-year STRIPS on February 15, 2011? What is the corresponding implied forward rate? How does your answer compare to the current yield on a one-year STRIPS? What does this tell you about the relationship between implied forward rates, the shape of the zero coupon yield curve, and market expectations about future spot interest rates? Remember to complete all parts of the questions, and report the results of your analysis. Week 3 – DQ2 - Bond Prices versus Yields Complete Concept Question 9 of Chapter 10: (a) What is the relationship between the price of a bond and its YTM? (b) Explain why some bonds sell at a premium to par value, and other bonds sell at a discount. What do you know about the relationship between the coupon rate and the YTM for premium bonds? What about discount bonds? For bonds selling at par value? (c) What is the relationship between the current yield and YTM for premium bonds? For discount bonds? For bonds selling at par value? Remember to complete all parts of the questions, and report the results of your analysis. Assignment Week 3 – Assignment – Bootstrapping Chapter 10 Problem 31 Complete problem 31 of Chapter 10 (shown below), and submit to your instructor. Show your calculations and the algebraic manipulation of the price equation for the bond. In addition to solving the problem, write a 100 to 200 word essay on the term structure of fixed income securities. One method used to obtain an estimate of the term structure of interest rates is called bootstrapping. Suppose you have a one-year zero coupon bond with a rate of r1 and a two-year bond with an annual coupon payment of C. To bootstrap the two-year rate, you can set up the following equation for the price (P) of the coupon bond: /(1+r_1 )+(C_2+Par value)/(1+r_2 )^2 Because you can observe all of the variables except r2, the spot rate for two years, you can solve for this interest rate. Suppose there is a zero coupon bond with one year to maturity that sells for $949 and a two-year bond with a 7.5 percent coupon paid annually that sells for $1,020. What is the interest rate for two years? Suppose a bond with three years until maturity and an 8.5 percent annual coupon sells for $1,029. What is the interest rate for three years? Week Four Discussions Week 4 – DQ1 – Expected Returns and Deviation Complete Problems 1, 2, and 3 from the Questions and Problems section of Chapter 11 (shown below). Remember to complete all parts of the questions, and report the results of your analysis. a. Use the following information on states of the economy and stock returns to calculate the expected return for Dingaling Telephone. State of Economy Probability of State of the Economy Security Return if State Occurs Recession .30 -8% Normal .40 13 Boom .30 23 b. Using the information in the previous question, calculate the standard deviation of returns. c. Repeat Questions 1 2 assuming that all three states are equally likely. Week 4 – DQ2 – Portfolio Weights Complete Problem 10 from the Questions and Problems section of Chapter 12: A stock has a beta of .9 and an expected return of 9 percent. A risk-free asset currently earns 4 percent. a. What is the expected return on a portfolio that is equally invested in the two assets? b. If a portfolio of the two assets has a beta of .5, what are the portfolio weights? c. If a portfolio of the two assets has an expected return of 8 percent, what is its beta? d. If a portfolio of the two assets has a beta of 1.80, what are the portfolio weights? How do you interpret the weights for the two assets in this case? Explain. Assignment Week 4 – Assignment – Performance Metrics Chapter 13 Problem 22 Complete Problem 22 in the Questions and Problems section of Chapter 13 (shown below). When you pick the best choice for your portfolio, defend your decision in a 100 - 200 word essay. You have been given the following return information for two mutual funds (Papa and Mama), the market index, and the risk-free rate. Year Papa Fund Mama Fund Market Risk-Free 2008 -12.6% -22.6 -24.5% 1% 2009 25.4 18.5 19.5 3 2010 8.5 9.2 9.4 2 2011 15.5 8.5 7.6 4 2012 2.6 -1.2 -2.2 2 Calculate the Sharpe ratio, Treynor ratio, Jensen’s alpha, information ratio, and R-squared for both funds and determine which is the best choice for your portfolio. Week Five Discussions Week 5 – DQ1 – Hedging with Futures Complete Concept Question 7 from Chapter 14: The town of South Park is planning a bond issue in six months and Kenny, the town treasurer, is worried that interest rates may rise, thereby reducing the value of the bond issue. Should Kenny buy or sell Treasury bond futures contracts to hedge the impending bond issue? Remember to complete all parts of the question and support your answers with examples from the text and other resources. Week 5 – DQ2 – Option Strategies Complete Concept Question 12 from Chapter 15: Recall the options strategies of a protective put and covered call discussed in the text. Suppose you have sold short some shares of stock. Discuss analogous option strategies and how you would implement them. (Hint: They’re called protective calls and covered puts.) Remember to complete all parts of the question and support your answers with examples from the text and other resources. Final Project Week 5 – Final Project – Construct a well-diversified portfolio The student will construct a well-diversified portfolio using an initial investment stake of $50,000 (the portfolio should use 95% of the fund, but they may not use more than $50,000). The student may include stocks, common or preferred; bonds, corporate or U.S. Treasury bonds; mutual funds; and futures contract or options. The student will use the closing prices from the first day of the class to determine the price of each issue. Only whole lots of any issues may be acquired, that is no less than 100 shares of common or preferred stock; no less than 5 corporate bonds or $10,000 for U.S. Treasury Bonds; no fewer than the minimum required investment for any mutual fund; and no fewer than 5 contracts for any option or futures position. The settlement date will be the first day of Week 3. The student does not have to use all of the above mentioned securities, but they must use more than one class. Transaction costs are ignored in the creation of the portfolio.

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Give your new college a year before making the decision that it's not right for you. There are so many emotions to deal with, you won't know if you don't like the school or you're just homesick. If after a year you are still feeling like college isn't right for you, you can then consider your other options.