Do problems: 9-8, 9-9, 9-11, 9-12, 9-14, 9-

16, and 9-18.

PREFERRED STOCK VALUATION Ezzell Corporation issued perpetual preferred stock with
a 10% annual dividend. The stock currently yields 8%, and its par value is $100.
a. What is the stocks value?
b. Suppose interest rates rise and pull the preferred stocks yield up to 12%. What is its
new market value?

a. What is the stocks value?

Par Vale 100

Annual Divdend-D 10
Yield -Rp 8

Vp=D/Rp $ 125.00

The Value of Stock is $125

b. Suppose interest rates rise and pull the preferred stocks yield up to 12%. What is its

D 10
Rp 12
Vp $ 83.33
The New market value of the stock is $83.33
PREFERRED STOCK RETURNS Bruner Aeronautics has perpetual preferred stock outstanding
with a par value of $100. The stock pays a quarterly dividend of $2, and its current
price is $80.
a. What is its nominal annual rate of return?
b. What is its effective annual rate of return?

a. What is its nominal annual rate of return?

Qtr Div 2 annual Ret 8
Current Price-Vp 80

Nominal Rate of Return

Vp=D/Rp 0.1
10%

The stocks Nominal Annual Rate of retutn is !0.00%

b. What is its effective annual rate of return?

EAR (1+Rnom/4)^4-1

10.38%
VALUATION OF A CONSTANT GROWTH STOCK A stock is expected to pay a dividend of
$0.50 at the end of the year (that is, D1 0.50), and it should continue to grow at a constant rate
of 7% a year. If its required return is 12%, what is the stocks expected price 4 years from today?

D1 0.5
G 7%

Rs 12% D1 D2 D3 D4 D5
1 2 3 4 5
Stock Price 4 years from now 0.5000 0.5350 0.5725 0.6125 0.6554

P4=D5/(Rs-G)

P4 ?
D5 0.6554
Rs 0.12
G 0.07

P4 $ 13.11

The stock value for 4 years from now is $13.11

2 2.12 2.2472 2.3816
NONCONSTANT GROWTH Microtech Corporation is expanding rapidly and currently
needs to retain all of its earnings; hence, it does not pay dividends. However, investors
expect Microtech to begin paying dividends, beginning with a dividend of $1.00 coming
3 years from today. The dividend should grow rapidlyat a rate of 50% per yearduring
Years 4 and 5; but after Year 5, growth should be a constant 8% per year. If the required
return on Microtech is 15%, what is the value of the stock today?

PV ?
Rs 15%
1 2 3 4 5 6
D1 D2 D3 D4 D5 D6
0 0 1 1.5 2.25 2.43
PV ($0.66)
($0.86)
18.47 2.43
$19.99 0.07
P5 37.14429
($18.47)
The Value of Stock is $19.99
4.658 66.54286
($46.12)
NONCONSTANT GROWTH Mitts Cosmetics Co.s stock price is $58.88, and it recently paid
a $2.00 dividend. This dividend is expected to grow by 25% for the next 3 years, then grow
forever at a constant rate, g; and rs 12%. At what constant rate is the stock expected to
grow after Year 3?

PV 58.88
D 2
G 25%
Rs 12 d d1 d2 d3 d4
2 2.5 3.125 3.90625
($2.23) ($2.49) ($2.78) ($7.50)

PV 58.88
Remaing PV $51.38 ($72.19)
FV of Remaing Div 72.19
Po3 d3(1+g)/(rs-g)
72.19 3.91+3.91g/(0.12-g)
8.6628 72.19g
8.6628-72.19g == 3.91+3.91g
4.7528 76.1
6.25%

Constant Growth Rate should be 6.25%

NONCONSTANT GROWTH STOCK VALUATION 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, then decline to gn 6%.
a. If D0 $1.60 and rs 10%, what is TTCs stock worth today? What are its expected
dividend and capital gains yields at this time, that is, during Year 1?
b. Now assume that TTCs period of supernormal growth is to last for 5 years rather than
2 years. How would this affect the price, dividend yield, and capital gains yield?
Answer in words only.
c. What will TTCs dividend and capital gains yields be once its period of supernormal
growth ends? (Hint: These values will be the same regardless of whether you examine
the case of 2 or 5 years of supernormal growth; the calculations are very easy.)
d. Of what interest to investors is the changing relationship between dividend and capital
gains yields over time?

g 20
gn -6%
r 10%
d0 d1 d2 d3 d4 d5
1.6 1.92 2.304 2.44224 2.588774 2.744101
19.2

a. If D0 $1.60 and rs 10%, what is TTCs stock worth today? What are its expected
dividend and capital gains yields at this time, that is, during Year 1?

P0=d1/(rs-g) 19.2

Dividend Yield 8.33%

Capital Gain Yield 1.67%

b. Now assume that TTCs period of supernormal growth is to last for 5 years rather than
2 years. How would this affect the price, dividend yield, and capital gains yield?
Answer in words only.

It shall be the same.

Dividend Yield 8.33%

Capital Gain Yield 1.67%

c. What will TTCs dividend and capital gains yields be once its period of supernormal
growth ends? (Hint: These values will be the same regardless of whether you examine
the case of 2 or 5 years of supernormal growth; the calculations are very easy.)
d. Of what interest to investors is the changing relationship between dividend and capital
gains yields over time?