PROBLEM #1

PAR VALUE = $92/SHARE (GIVEN)

ANNUAL DIVIDEND RATE = 12.5% (GIVEN)

ANNUAL DIVIDEND = D = PAR VALUE * ANNUAL DIVIDEND RATE

= 92*.125 = $11.5/SHARE

REQUIRED RATE OF RETURN = 13.2% (GIVEN)

CURRENT PRICE P0 = $89/SHARE (GIVEN)

  1. VALUE = D/K = 11.5/0.132 = $87.1212

^

  1. K = D/ P0 = 11.5/89 = 0.1292 OR 12.9213%
  2. PRICE = $89 > VALUE = $87.1212

OVERPRICED DO NOT BUY

D. REQUIRED RETURN = 13.2%>EXPECTED RETURN=12.9213%

OVERPRICED DO NOT BUY

Problem #2

PAR VALUE = $90/SHARE (GIVEN)

ANNUAL DIVIDEND RATE = 11.9% (GIVEN)

ANNUAL DIVIDEND = D = PAR VALUE * ANNUAL DIVIDEND RATE

= 90*.119 = $10.71/SHARE

REQUIRED RATE OF RETURN = 13.7% (GIVEN)

CURRENT PRICE P0 = $82/SHARE (GIVEN)

  1. VALUE = D/K = 10.71/0.137 = $78.1752

^

  1. K = D/ P0 = 10.71/82 = 0.13061 = 13.061%
  1. PRICE = $82 > VALUE = $78.1752

OVERPRICED DO NOT BUY

D. REQUIRED RETURN = 13.7%EXPECTED RETURN = 13.061%

OVERPRICED DO NOT BUY

PROBLEM #3

THE COMMON STOCK DIVIDENDS HAVE ZERO GROWTH (GIVEN)

D = $5/SHARE (GIVEN)

K= 15% (GIVEN)

P0 = $22/SHARE (GIVEN)

1. VALUE = D/K = 5/0.15 = $33.3333

^

2. K = 5/22 = 0.2273 OR 22.7273%

3. PRICE = $22 < VALUE = $33.3333 UNDERPRICED BUY

4. REQUIRED RETURN = 15% < EXPECTED RETURN = 22.7273%UNDERPRICED BUY

PROBLEM #4

THE COMMON STOCK DIVIDENDS HAVE CONSTANT GROWTH (GIVEN)

THE DIVIDEND IS EXPECTED A YEAR FROM NOW

D1 = $2.25/SHARE (GIVEN)

  1. g = 6% (GIVEN)

K = 15.8% (GIVEN)

VALUE = D1/(K-g)= 2.25/(.158-.06)=22.9592

  1. g = 5% (GIVEN)

K = 17% (GIVEN)

VALUE = D1/(K-g)= 2.25/(.17-.05)=18.7500

c. g = 7.5% (GIVEN)

K = 20.5% (GIVEN)

VALUE = D1/(K-g)= 2.25/(.205-.075)=17.3077

PROBLEM #5

THE COMMON STOCK DIVIDENDS HAVE CONSTANT GROWTH (GIVEN)

THE DIVIDEND IS EXPECTED A YEAR FROM NOW

D1= $2.2/ SHARE (GIVEN)

g = 6% (GIVEN)

K = 20% (GIVEN)

P0 = $16/SHARE (GIVEN)

  1. EXPECTED DIVIDEND YIELD = D1/ P0

EXPECTED DIVIDEND YIELD = D1/ P0 = 2.2 /16

= 0.1375 OR 13.75%

  1. EXPECTED CAPITAL GAINS YIELD = g = 6%
  2. TOTAL EXPECTED RETURN = 13.75 + 6 = 19.75%
  3. VALUE = D1/ (K-g) = 2.2/ (.20-.06) = $15.7143/SHARE
  4. PRICE = $16 > VALUE = $15.7143 OVERPRICED DO NOT BUY
  5. REQUIRED RETURN =20%>EXPECTED RETURN=19.75%OVERPRICED DO NOT BUY

PROBLEM #6

Thecommon stock dividends have constant growth (given)

Thedividend is expected a year from now

D1 = $2.4/SHARE (GIVEN)

g = 5% (GIVEN)

K = 20% (GIVEN)

P0 = $14.75/SHARE (GIVEN)

  1. EXPECTED DIVIDEND YIELD = D1/ P0 = 2.4/14.75 = 0.1627 0R 16.2712%
  1. EXPECTED CAPITAL GAINS YIELD = g = 5%
  1. TOTAL EXPECTED RETURN = 16.2712 + 5 = 21.2712%
  1. VALUE = D1/ (K-g) = 2.4/ (.20-.05) = 2.4/0.15 = $16/SHARE
  1. PRICE = $14.75 < VALUE = $16 UNDERPRICED BUY
  1. EXPECTED RETURN = 21.2721% > REQUIRED RETURN =20%

UNDERPRICED BUY

PROBLEM #7

THE COMMON STOCK DIVIDENDS HAVE CONSTANT GROWTH (GIVEN)

THE DIVIDEND HAS JUST BEEN PAID

D0= $2.2/ SHARE (GIVEN)

g = 6% (GIVEN)

K = 20% (GIVEN)

P0 = $16/SHARE (GIVEN)

  1. EXPECTED DIVIDEND YIELD = D1/ P0

D1 = D0 (1+g) = 2.2 * 1.06 = $2.3320

EXPECTED DIVIDEND YIELD = D1/ P0 = 2.3320/16

= 0.1458 OR 14.5750%

  1. EXPECTED CAPITAL GAINS YIELD = g = 6%
  1. TOTAL EXPECTED RETURN = 14.5750 + 6 = 20.5750%
  1. VALUE = D1/ (K-g) = 2.3320/ (.20-.06) = 2.3320/0.14 = $16.6571/SHARE
  1. PRICE = $16 < VALUE = $16.6571 UNDERPRICED BUY
  1. REQUIRED RETURN =20%EXPECTED RETURN = 20.5750%

UNDERPRICED BUY