1. In what circumstances would you choose to use a dividend discount model rather than a free...

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1. In what circumstances would you choose to use a dividend discount model rather than a free cash flow model to value a firm?

5. Jand, Inc., currently pays a dividend of $1.22, which is expected to grow indefinitely at 5%. If the current value of Jand's shares based on the constant-growth dividend discount model is $32.03, what is the required rate of return?

6. A firm pays a current dividend of $1, which is expected to grow at a rate of 5% indefinitely. If the current value of the firm's shares is $35, what is the required return applicable to the investment based on the constant-growth dividend discount model (DDM)?

8. A firm has current assets that could be sold for their book value of $10 million. The book value of its fixed assets is $60 million, but they could be sold for $90 million today. The firm has total debt with a book value of $40 million, but interest rate declines have caused the market value of the debt to increase to $50 million. What is this firm's market-to-book ratio? (LO 13-1)

9. The market capitalization rate for Admiral Motors Company is 8%. Its expected ROE is 10% and its expected EPS is $5. If the firm's plowback ratio is 60%, what will be its P/E ratio? (LO 13-2)

10. Miltmar Corporation will pay a year-end dividend of $4, and dividends thereafter are expected to grow at the constant rate of 4% per year. The risk-free rate is 4%, and the expected return on the market portfolio is 12%. The stock has a beta of 0.75. What is the intrinsic value of the stock?

16. Explain why the following statements are true/false/uncertain. (LO 13-3)

a. With all else held constant, a firm will have a higher P/E if its beta is higher.

b. P/E will tend to be higher when ROE is higher (assuming plowback is positive).

c. P/E will tend to be higher when the plowback rate is higher.

19. a . MF Corp. has an ROE of 16% and a plowback ratio of 50%. If the coming year's earnings are expected to be $2 per share, at what price will the stock sell? The market capitalization rate is 12%. b. What price do you expect MF shares to sell for in three years?

20. The market consensus is that Analog Electronic Corporation has an ROE of 9% and a beta of 1.25. It plans to maintain indefinitely its traditional plowback ratio of 2/3. This year's earnings were $3 per share. The annual dividend was just paid. The consensus estimate of the coming year's market return is 14%, and T-bills currently offer a 6% return. (LO 13-3)

a. Find the price at which Analog stock should sell.

b. Calculate the P/E ratio.

c. Calculate the present value of growth opportunities. d. Suppose your research convinces you Analog will announce momentarily that it will immediately reduce its plowback ratio to 1/3. Find the intrinsic value of the stock. e. The market is still uchnaware of this decision. Explain why V 0 no longer equals P 0 and why V 0 is greater or less than P 0 .

24. The MoMi Corporation's cash flow from operations before interest and taxes was $2 million in the year just ended, and it expects that this will grow by 5% per year forever. To make this happen, the firm will have to invest an amount equal to 20% of pretax cash flow each year. The tax rate is 21%. Depreciation was $200,000 in the year just ended and is expected to grow at the same rate as the operating cash flow. The appropriate market capitalization rate for the unleveraged cash flow is 12% per year, and the firm currently has debt of $4 million outstanding. Use the free cash flow approach to value the firm's equity.