Assignment 7 - If you bought a share of common stock

Assignment 7

For this Week 7 Assignment, you will submit your written answers to questions and calculated answers to problems on an Excel spreadsheet using formulas for your calculations. I will be downloading the spreadsheet to review the formulas in the cells of your answers.

Chapter 9

Question 9-3

Question 9-4

Question 9-5

Problem 9-1

Problem 9-11

Questions.

9-3 If you bought a share of common stock, you would probably expect to receive dividends plus an eventual capital gain. Would the distribution between the dividend yield and the capital gains yield be influenced by the firm’s decision to pay more dividends rather than to retain and reinvest more of its earnings? Explain.

9-4 Two investors are evaluating GE’s stock for possible purchase. They agree on the expected value of D1 and on the expected future dividend growth rate. Further, they agree on the riskiness of the stock.

However, one investor normally holds stocks for 2 years, while the other holds stocks for 10 years. On the basis of the type of analysis done in this chapter, should they both be willing to pay the same price for GE’s stock? Explain.

9-5 A bond that pays interest forever and has no maturity is a perpetual bond. In what respect is a perpetual bond similar to a no-growth common stock? Are there preferred stocks that are evaluated similarly to perpetual bonds and other preferred issues that are more like bonds with finite lives? Explain.

PROBLEMS

9-1 DPS CALCULATION Weston Corporation just paid a dividend of $1.00 a share (i.e., D0 =$1 00). The dividend is expected to grow 12% a year for the next 3 years and then at 5% a year thereafter. What is the expected dividend per share for each of the next 5 years?

9-11 VALUATION OF A CONSTANT GROWTH STOCK A stock is expected to pay a dividend of $2.75 at the end of the year (i.e., D1 =2.75), and it should continue to grow at a constant rate of 5% a year. If its required return is 15%, what is the stock’s expected price 4 years from today?