This website uses cookies to ensure you have the best experience. Learn more

Value Of Common Stocks Essay

2119 words - 9 pages


The Value of Common Stocks

Answers to Problem Sets

1. a. True. This is a condition for equilibrium in well-functioning capital markets. All stocks in a particular risk class must offer the same rate of return. If a certain stock, for example, is priced above others in the equivalent risk class, investors would sell their shares to buy cheaper shares from companies in the same risk class. This would force the price of that higher priced stock down to the equilibrium price. The same happens for a stock priced below equilibrium—investors would rush to buy the stock, sending its price back up.

b. True. When shareholders buy a particular stock, they ...view middle of the document...


Est. Time: 01-05

 8. With next year’s dividend at $10/share and next year’s price at $350/share (calculated by taking the current year’s price of $333.33 x a 5% growth rate), Z’s forecasted dividends and prices grow as follows:


Calculate the expected rates of return:

From year 0 to 1: ​ [pic]  

From year 1 to 2: [pic]

From year 2 to 3: ​  [pic]

As shown, all three investors expect an 8% return over their respective one-, two.-, and three-year investments.

Est. Time: 06-10

9. a. False. The value of a share equals the present value of the expected future dividends per share. Earnings per share are not used to calculate share price because part of earnings are used to reinvest in plant, equipment, and working capital.

b. True. The expected return is equal to the yearly dividend divided by the share price. If the firm does not grow and all earnings are paid out as dividends, then the expected return is also equal to the EPS/share price. Therefore, P0 = DIV1/r = EPS1/r. We must still account for the present value of the growth opportunities, however, so P0 = EPS1/r + PVGO.

Est. Time: 01-05

10. PVGO = 0, and EPS1 equals the average future earnings the firm could generate
under no-growth policy.

Est. Time: 01-05

11. Free cash flow is the amount of cash left over and available to pay out to investors after all investments necessary for growth. In our simple examples, free cash flow equals operating cash flow minus capital expenditure. Free cash flow can be negative if investments are large.

Est. Time: 01-05

12. The value at the end of a forecast period. Horizon value can be estimated
using the constant-growth DCF formula or by using price–earnings or market–
book ratios for similar companies.

Est. Time: 01-05

13. If PVGO = 0 at the horizon date, H, horizon value = earnings forecasted for H +
1 divided by r.

Est. Time: 06-10

14. Internet exercise; answers will vary.

Est. Time: 01-05

15. Internet exercise; answers will vary.

Est. Time: 01-05

16. Internet exercise; answers will vary.

Est. Time: 06-10

17. Internet exercise; answers will vary.

Est. Time: 06-10

18. [pic]
At a capitalization rate of 10%, Stock C is the most valuable.
For a capitalization rate of 7%, The results are:
PA = $142.86
PB = $166.67
PC = $156.48

Therefore, Stock B is the most valuable at a 7% capitalization rate.

Est. Time: 06-10

19. a. [pic]

b. First, compute the real discount rate as follows:

(1 + rnominal) = (1 + rreal) ( (1 + inflation rate)

1.095 = (1 + rreal) ( 1.0275

(1 + rreal) = (1.095/1.0275) – 1 = .0657 = 6.57%

In real terms, g = 0. Therefore:


Est. Time:...

Other Essays Like Value of Common Stocks

Bill and Miller Value Trust Essay

1615 words - 7 pages we should make some analysis on what kind of shares S&P 500 deals with versus what kind of shares Value Trust deals with. S&P comprises of 500 widely held common stocks in other words large cap stocks. On the other hand 50% of Value Trust’s assets were of only 10 large cap companies and Value Trust was open for investing in growth companies. This made the beta of Value Trust (1.31 as taken from Exhibit 1) higher than S&P’s beta indicating that

Lqwefbgiy34G Essay

1924 words - 8 pages 1926 -1975. • International size effect: Research also suggests that size effect exists in the UK and Japan which led to DFA’s introduction of international small stock funds. • Value effect: DFA also focused on value stocks (low Price-Book [P/B] ratios). This was based on a series of previous academic research, including Basu (1980), Bhandari (1986), Rosenburg, Reid and Lanstein (1985) and Fama and French (1992, 1993). • In 1992

Understanding Concepts Return Stock, Risks, Portfolio, Beta, Wacc

559 words - 3 pages portfolio created for any investor's . UNDERSTANDING CONCEPTS STOCKS RISK 5 Question 5 States what WACC measures and explain the WACC assumptions used to value a project. The weighted average cost of capital (WACC) is what any firm actual value is and to know this there debt that actually have today,the equity ,the cost of capital to actually run the firm

Fi515 Midterm 2

1264 words - 6 pages back common stock at its book value. How much must the firm borrow to achieve the target debt ratio? Student Answer: $155,800 $164,000 $172,200 $180,810 $189,851 Instructor Explanation: b: 40%*410k=$164. Points Received: 10 of 10 Comments: 4. Question : (TCO B) Suppose a State of New York bond will pay $1,000 10 years from now. If the going interest rate on

Valuing Stocks

545 words - 3 pages , 2014)? The S&P 500 is a broad market index that includes stocks of the 500 largest US firms from ten sectors of the economy. It captures 80% of the overall stock market capitalization and is a good proxy for what is occurring in the overall stock market. 3. "What are the differences between common stock and preferred stock" (Cornett, Adair, & Nofsinger, 2014, p. 203)? Common stock dividends change over time, hopefully

Keller Fund

2654 words - 11 pages established in 1959 and since then, it sought its objective by investing in a diversified portfolio of common stocks with above average potential for growth in revenues and earnings. High technology stocks tended to dominate its portfolio. In most years, the fund’s return performance equaled or exceeded that of the Standard & Poor’s composite index of 500 common stocks, though its net asset value experienced greater volatility than that of the market as

Valuing Stocks

1157 words - 5 pages QUESTIONNAIRE ON VALUING STOCKS By: Bahae eddine Boussouf Nadezda Vovk 1) Common stock: a share of ownership in the corporation, which confers rights to any common dividends as well as rights to vote on election of directors, mergers, or other major events. Preferred stock: A class of ownership in a corporation that has a higher claim on the assets and earnings than common stock. Preferred stock generally has a dividend that must be paid

Bond Math

696 words - 3 pages return on the Copiers, Inc. Bond when it was issued. Rating | AAA |   | AA |   | A |   | BBB | Beta | 0.19 | | 0.20 | | 0.21 | | 0.22 | Source: Fama, Gene and Ken French, 1993, "Common Risk Factors in the Returns on Bonds and Stocks", on Bonds and Stocks, “Journal of Financial Economics, 33, 3-56, Table 4 | Expected Return Rate = (Risk Free Return) + (Beta) * (Expected Market Return – Risk Free Return) Risk Free Return: Treasury

Comparison Of The Stock Market Of 1929 And 2006

659 words - 3 pages investors ruled the market to increase their wealth.§Unethical activities, like insider trading, emerged in the stock market of 1929.§The government regulates stock market today. The Securities and Exchange Commission was established to punish people who violate it in today's market.The stock prices in 1929 were over-valued which were much higher than today.§There were some stocks doubled its value in 1929. They reached the highest in

Whole Foods Market

855 words - 4 pages significantly higher than their accounting value). * Price-to-earnings ratio, or P/E ratio, is an equity valuation multiple. It is defined as market price per share divided by annual earnings per share. By comparing price and earnings per share for a company, one can analyze the market's stock valuation of a company and its shares relative to the income the company is actually generating. Stocks with higher (or more certain) forecast

Bill Miller

577 words - 3 pages as the S&P 500 and Russell. Miller’s methodology includes buying low-price, high intrinsic-value stocks, researching areas of the market that look least promising, the lowest average cost wins, high price stocks can still be good (Wal-Mart and Microsoft), think long-term and anticipate rather than reacting, mixture of cyclically underpriced stock and secularly underpriced stock, be aggressive when stocks are low and less when stocks are high

Related Papers

Dfa Dimensional Fund Advisor Essay

1041 words - 5 pages findings of Fama/French 1992 document titled “The Cross-Section of the Expected Stock Returns”. In 1993 Fama/French prolonged the research in the “Common Factors in the Expected Returns of Stocks and Bonds” that is known as the “Fama-French Three-Factor Model” This stated that the sticks with the higher ratio of book value to market value equity consistently earned higher returns as compared to the stocks of low BE-ME ratio. Basu had shown that high

Winfield Refuge Essay

1277 words - 6 pages ownership, value creation for shareholders etc. Ted Kale Ted does not seem to be against issuing common stock. Ted’s concern is centered on 2 observations: Winfield’s Price-Equity ratio and dilution of management control by issuing new common stocks. Ted observes that all other major competitors have higher P/E ratio and hence Winfield should issue stock (if at all) for a higher price than $17.75/share. However, Winfield stock has not done well

Financing Alternatives Julian Eistheimer & Co

1184 words - 5 pages = 36% then they issue stocks worth $12M (Debt Ratio = (36+12)/(132+12) = 48/144) Debt ratio = 33% - if they borrow $12M to finance it's initial surveys they can offer warrants - it is favorable to the lender since if debt is issued with warrants and if the surveys of minerals prove to be favorable, market value of stocks will definitely rise, and they will have the

Summary Prospectus Essay

1298 words - 6 pages Fund Objective The Gold Digger Fund seeks to achieve long-term capital appreciation by investing in U.S. and foreign common stocks that exhibit value characteristics. The Fund also invests in Derivatives and Fixed-Income securities. The Fund’s Managers * Rodrigo Reis de Almeida * Haozhuan Li * Yuhang Sun Investment Strategy The Fund invests at least 60% of total assets in U.S. common stocks, with focus on value stocks