I need the solution forexsercise 33 - 38 on chapter 9of corporate financeas the attached file.

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Chapter 9 Stock Valuation 299 9. Corporate Ethics Is it unfair or unethical for corporations to create classes of stock with unequal voting rights? 10. Stock Valuation Evaluate the following statement: Managers should not focus on the current stock value because doing so will lead to an overemphasis on short-term profits at the expense of long-term profits. Questions and Problems 1. sh Th is BASIC (Questions 110) INTERMEDIATE (Questions 1132) 2. Stock Values The next dividend payment by ECY, Inc., will be $3.20 per share. The dividends are anticipated to maintain a growth rate of 6 percent, forever. If ECY stock currently sells for $63.50 per share, what is the required return? 3. Stock Values For the company in the previous problem, what is the dividend yield? What is the expected capital gains yield? 4. Stock Values White Wedding Corporation will pay a $2.65 per share dividend next year. The company pledges to increase its dividend by 4.75 percent per year, indefinitely. If you require a return of 11 percent on your investment, how much will you pay for the company's stock today? 5. Stock Valuation Siblings, Inc., is expected to maintain a constant 6.4 percent growth rate in its dividends, indefinitely. If the company has a dividend yield of 4.3 percent, what is the required return on the company's stock? 6. Stock Valuation Suppose you know that a company's stock currently sells for $72 per share and the required return on the stock is 11.5 percent. You also know that the total return on the stock is evenly divided between a capital gains yield and a dividend yield. If it's the company's policy to always maintain a constant growth rate in its dividends, what is the current dividend per share? 7. Stock Valuation Gruber Corp. pays a constant $9 dividend on its stock. The company will maintain this dividend for the next 12 years and will then cease paying dividends forever. If the required return on this stock is 10 percent, what is the current share price? 8. Valuing Preferred Stock Ayden, Inc., has an issue of preferred stock outstanding that pays a $5.90 dividend every year, in perpetuity. If this issue currently sells for $87 per share, what is the required return? 9. Growth Rate The newspaper reported last week that Bennington Enterprises earned $34 million this year. The report also stated that the firm's return on equity is 16 percent. Bennington retains 80 percent of its earnings. What is the firm's earnings growth rate? What will next year's earnings be? 10. Stock Valuation and PE The Germinating Flower Co. has earnings of $1.75 per share. The benchmark PE for the company is 18. What stock price would you consider appropriate? What if the benchmark PE were 21? 11. Stock Valuation Universal Laser, Inc., just paid a dividend of $3.10 on its stock. The growth rate in dividends is expected to be a constant 6 percent per year, indefinitely. Investors require a 15 percent return on the stock for the first three years, a 13 percent return for the next three years, and then an 11 percent return thereafter. What is the current share price for the stock? https://www.coursehero.com/file/8394661/Corporate-Finance-Ross-Chapter9-Questions/ www.mhhe.com/rwj ar stu ed d vi y re aC s o ou urc rs e eH w er as o. co m finance Stock Values The Starr Co. just paid a dividend of $2.15 per share on its stock. The dividends are expected to grow at a constant rate of 5 percent per year, indefinitely. If investors require a return of 11 percent on the stock, what is the current price? What will the price be in three years? In 15 years? 300 Nonconstant Growth Metallica Bearings, Inc., is a young start-up company. No dividends will be paid on the stock over the next nine years, because the firm needs to plow back its earnings to fuel growth. The company will pay a $15 per share dividend in 10 years and will increase the dividend by 5.5 percent per year thereafter. If the required return on this stock is 13 percent, what is the current share price? 13. Nonconstant Dividends Bucksnort, Inc., has an odd dividend policy. The company has just paid a dividend of $12 per share and has announced that it will increase the dividend by $3 per share for each of the next five years, and then never pay another dividend. If you require a return of 12 percent on the company's stock, how much will you pay for a share today? 14. Nonconstant Dividends Lohn Corporation is expected to pay the following dividends over the next four years: $10, $7, $6, and $2.75. Afterwards, the company pledges to maintain a constant 5 percent growth rate in dividends forever. If the required return on the stock is 13 percent, what is the current share price? ar stu ed d vi y re aC s o ou urc rs e eH w er as o. co m 12. 15. Differential Growth Hughes Co. is growing quickly. Dividends are expected to grow at a rate of 20 percent for the next three years, with the growth rate falling off to a constant 5 percent thereafter. If the required return is 12 percent and the company just paid a $2.80 dividend, what is the current share price? 16. Differential Growth Janicek Corp. is experiencing rapid growth. Dividends are expected to grow at 30 percent per year during the next three years, 18 percent over the following year, and then 8 percent per year indefinitely. The required return on this stock is 11 percent, and the stock currently sells for $65 per share. What is the projected dividend for the coming year? 17. Negative Growth Antiques R Us is a mature manufacturing firm. The company just paid a dividend of $9, but management expects to reduce the payout by 4 percent per year, indefinitely. If you require an 11 percent return on this stock, what will you pay for a share today? 18. Finding the Dividend Mau Corporation stock currently sells for $58.32 per share. The market requires a return of 11.5 percent on the firm's stock. If the company maintains a constant 5 percent growth rate in dividends, what was the most recent dividend per share paid on the stock? 19. Valuing Preferred Stock Fifth National Bank just issued some new preferred stock. The issue will pay an annual dividend of $8 in perpetuity, beginning five years from now. If the market requires a return of 5.6 percent on this investment, how much does a share of preferred stock cost today? 20. Using Stock Quotes You have found the following stock quote for RJW Enterprises, Inc., in the financial pages of today's newspaper. What is the annual dividend? What was the closing price for this stock that appeared in yesterday's paper? If the company currently has 25 million shares of stock outstanding, what was net income for the most recent four quarters? sh Th is www.mhhe.com/rwj Part II Valuation and Capital Budgeting 21. YTD %Chg Stock SYM YLD PE Last Net Chg 1.1 RJW Enterp. RJW 1.9 23 26.18 .13 Taxes and Stock Price You own $100,000 worth of Smart Money stock. One year from now, you will receive a dividend of $2.25 per share. You will receive a $2.40 dividend two years from now. You will sell the stock for $65 per share three years from now. Dividends are taxed at the rate of 28 percent. Assume there is no capital gains tax. The aftertax required rate of return is 15 percent. How many shares of stock do you own? https://www.coursehero.com/file/8394661/Corporate-Finance-Ross-Chapter9-Questions/ Chapter 9 Nonconstant Growth and Quarterly Dividends Pasqually Mineral Water, Inc., will pay a quarterly dividend per share of $.80 at the end of each of the next 12 quarters. Thereafter, the dividend will grow at a quarterly rate of 1 percent, forever. The appropriate rate of return on the stock is 10 percent, compounded quarterly. What is the current stock price? 23. Finding the Dividend Briley, Inc., is expected to pay equal dividends at the end of each of the next two years. Thereafter, the dividend will grow at a constant annual rate of 4 percent, forever. The current stock price is $45. What is next year's dividend payment if the required rate of return is 11 percent? 24. Finding the Required Return Juggernaut Satellite Corporation earned $18 million for the fiscal year ending yesterday. The firm also paid out 30 percent of its earnings as dividends yesterday. The firm will continue to pay out 30 percent of its earnings as annual, end-of-year dividends. The remaining 70 percent of earnings is retained by the company for use in projects. The company has 2 million shares of common stock outstanding. The current stock price is $93. The historical return on equity (ROE) of 13 percent is expected to continue in the future. What is the required rate of return on the stock? ar stu ed d vi y re aC s o ou urc rs e eH w er as o. co m 22. 25. Dividend Growth Four years ago, Bling Diamond, Inc., paid a dividend of $1.35 per share. Bling paid a dividend of $1.77 per share yesterday. Dividends will grow over the next five years at the same rate they grew over the last four years. Thereafter, dividends will grow at 5 percent per year. What will Bling Diamond's cash dividend be in seven years? 26. Price-Earnings Ratio Consider Pacific Energy Company and U.S. Bluechips, Inc., both of which reported earnings of $950,000. Without new projects, both firms will continue to generate earnings of $950,000 in perpetuity. Assume that all earnings are paid as dividends and that both firms require a return of 12 percent. a. What is the current PE ratio for each company? b. Pacific Energy Company has a new project that will generate additional earnings of $100,000 each year in perpetuity. Calculate the new PE ratio of the company. c. U.S. Bluechips has a new project that will increase earnings by $200,000 in perpetuity. Calculate the new PE ratio of the firm. 27. Growth Opportunities The Stambaugh Corporation currently has earnings per share of $9.40. The company has no growth and pays out all earnings as dividends. It has a new project that will require an investment of $1.95 per share in one year. The project is only a two-year project, and it will increase earnings in the two years following the investment by $2.75 and $3.05, respectively. Investors require a return of 12 percent on Stambaugh stock. a. What is the value per share of the company's stock assuming the firm does not undertake the investment opportunity? b. If the company does undertake the investment, what is the value per share now? c. Again, assume the company undertakes the investment. What will the price per share be four years from today? 28. Growth Opportunities Rite Bite Enterprises sells toothpicks. Gross revenues last year were $7.5 million, and total costs were $3.4 million. Rite Bite has 1 million shares of common stock outstanding. Gross revenues and costs are expected to grow at 5 percent per year. Rite Bite pays no income taxes. All earnings are paid out as dividends. a. If the appropriate discount rate is 13 percent and all cash flows are received at year's end, what is the price per share of Rite Bite stock? b. Rite Bite has decided to produce toothbrushes. The project requires an immediate outlay of $17 million. In one year, another outlay of $6 million will be needed. The year after that, earnings will increase by $4.2 million. That profit level will is sh 301 https://www.coursehero.com/file/8394661/Corporate-Finance-Ross-Chapter9-Questions/ www.mhhe.com/rwj Th Stock Valuation 302 Part II Valuation and Capital Budgeting be maintained in perpetuity. What effect will undertaking this project have on the price per share of the stock? 30. Stock Valuation and PE Ramsay Corp. currently has an EPS of $2.35, and the benchmark PE for the company is 21. Earnings are expected to grow at 7 percent per year. a. What is your estimate of the current stock price? b. What is the target stock price in one year? c. Assuming the company pays no dividends, what is the implied return on the company's stock over the next year? What does this tell you about the implicit stock return using PE valuation? 31. Stock Valuation and EV FFDP Corp. has yearly sales of $28 million and costs of $12 million. The company's balance sheet shows debt of $54 million and cash of $18 million. There are 950,000 shares outstanding and the industry EV/EBITDA multiple is 7.5. What is the company's enterprise value? What is the stock price per share? 32. Stock Valuation and Cash Flows Eberhart Manufacturing has projected sales of $145 million next year. Costs are expected to be $81 million and net investment is expected to be $15 million. Each of these values is expected to grow at 14 percent the following year, with the growth rate declining by 2 percent per year until the growth rate reaches 6 percent, where it is expected to remain indefinitely. There are 5.5 million shares of stock outstanding and investors require a return of 13 percent return on the company's stock. The corporate tax rate is 40 percent. a. What is your estimate of the current stock price? b. Suppose instead that you estimate the terminal value of the company using a PE multiple. The industry PE multiple is 11. What is your new estimate of the company's stock price? is Capital Gains versus Income Consider four different stocks, all of which have a required return of 17 percent and a most recent dividend of $3.50 per share. Stocks W, X, and Y are expected to maintain constant growth rates in dividends for the foreseeable future of 8.5 percent, 0 percent, and 5 percent per year, respectively. Stock Z is a growth stock that will increase its dividend by 30 percent for the next two years and then maintain a constant 8 percent growth rate thereafter. What is the dividend yield for each of these four stocks? What is the expected capital gains yield? Discuss the relationship among the various returns that you find for each of these stocks. www.mhhe.com/rwj 33. sh Th CHALLENGE (Questions 3338) Growth Opportunities California Real Estate, Inc., expects to earn $71 million per year in perpetuity if it does not undertake any new projects. The firm has an opportunity to invest $16 million today and $5 million in one year in real estate. The new investment will generate annual earnings of $11 million in perpetuity, beginning two years from today. The firm has 15 million shares of common stock outstanding, and the required rate of return on the stock is 12 percent. Land investments are not depreciable. Ignore taxes. a. What is the price of a share of stock if the firm does not undertake the new investment? b. What is the value of the investment? c. What is the per-share stock price if the firm undertakes the investment? ar stu ed d vi y re aC s o ou urc rs e eH w er as o. co m 29. 34. Stock Valuation Most corporations pay quarterly dividends on their common stock rather than annual dividends. Barring any unusual circumstances during the year, the board raises, lowers, or maintains the current dividend once a year and then pays this dividend out in equal quarterly installments to its shareholders. a. Suppose a company currently pays a $3.20 annual dividend on its common stock in a single annual installment, and management plans on raising this dividend by https://www.coursehero.com/file/8394661/Corporate-Finance-Ross-Chapter9-Questions/ Chapter 9 Stock Valuation 303 5 percent per year indefinitely. If the required return on this stock is 11 percent, what is the current share price? b. Now suppose that the company in (a) actually pays its annual dividend in equal quarterly installments; thus, this company has just paid a dividend of $.80 per share, as it has for the previous three quarters. What is your value for the current share price now? (Hint: Find the equivalent annual end-of-year dividend for each year.) Comment on whether or not you think that this model of stock valuation is appropriate. is Nonconstant Growth Storico Co. just paid a dividend of $3.85 per share. The company will increase its dividend by 20 percent next year and will then reduce its dividend growth rate by 5 percentage points per year until it reaches the industry average of 5 percent dividend growth, after which the company will keep a constant growth rate forever. If the required return on Storico stock is 13 percent, what will a share of stock sell for today? 37. Nonconstant Growth This one's a little harder. Suppose the current share price for the firm in the previous problem is $78.43 and all the dividend information remains the same. What required return must investors be demanding on Storico stock? (Hint: Set up the valuation formula with all the relevant cash flows, and use trial and error to find the unknown rate of return.) 38. Growth Opportunities Burklin, Inc., has earnings of $18 million and is projected to grow at a constant rate of 5 percent forever because of the benefits gained from the learning curve. Currently, all earnings are paid out as dividends. The company plans to launch a new project two years from now that would be completely internally funded and require 30 percent of the earnings that year. The project would start generating revenues one year after the launch of the project and the earnings from the new project in any year are estimated to be constant at $6.5 million. The company has 7.5 million shares of stock outstanding. Estimate the value of the stock. The discount rate is 10 percent. sh Th 36. Excel Master It! In practice, the use of the dividend discount model is refined from the method we presented in the textbook. Many analysts will estimate the dividend for the next five years and then estimate a perpetual growth rate at some point in the future, typically 10 years. Rather than have the dividend growth fall dramatically from the fast growth period to the perpetual growth period, linear interpolation is applied. That is, the dividend growth is projected to https://www.coursehero.com/file/8394661/Corporate-Finance-Ross-Chapter9-Questions/ www.mhhe.com/rwj Growth Opportunities Lewin Skis, Inc., today expects to earn $8.50 per share for each of the future operating periods (beginning at Time 1), today if the firm makes no new investments and returns the earnings as dividends to the shareholders. However, Clint Williams, president and CEO, has discovered an opportunity to retain and invest 20 percent of the earnings beginning three years from today. This opportunity to invest will continue for each period indefinitely. He expects to earn 10 percent on this new equity investment, the return beginning one year after each investment is made. The firm's equity discount rate is 12 percent. a. What is the price per share of Lewin Skis, Inc., stock without making the new investment? b. If the new investment is expected to be made, per the preceding information, what would the price of the stock be now? c. Suppose the company could increase the investment in the project by whatever amount it chose. What would the retention ratio need to be to make this project attractive? ar stu ed d vi y re aC s o ou urc rs e eH w er as o. co m 35. 304 Part II Valuation and Capital Budgeting fall by an equal amount each year. For example, if the high-growth period is 15 percent for the next five years and the dividends are expected to fall to a 5 percent perpetual growth rate five years later, the dividend growth rate would decline by 2 percent each year. The Value Line Investment Survey provides information for investors. Below, you will find information for IBM found in the 2012 edition of Value Line: www.mhhe.com/rwj 2011 dividend 5-year dividend growth rate $2.90 9.5% ar stu ed d vi y re aC s o ou urc rs e eH w er as o. co m a. Assume that the perpetual growth rate of 5 percent begins 11 years from now and use linear interpolation between the high growth rate and perpetual growth rate. Construct a table that shows the dividend growth rate and dividend each year. What is the stock price at Year 10? What is the stock price today? b. How sensitive is the current stock price to changes in the perpetual growth rate? Graph the current stock price against the perpetual growth rate in 11 years to find out. Instead of applying the constant dividend growth model to find the stock price in the future, analysts will often combine the dividend discount method with price ratio valuation, often with the PE ratio. Remember that the PE ratio is the price per share divided by the earnings per share. So, if we know what the PE ratio is, we can solve for the stock price. Suppose we also have the following information about Boeing: Payout ratio PE ratio at constant growth rate 30% 15 STOCK VALUATION AT RAGAN ENGINES Larissa has been talking with the company's directors about the future of East Coast Yachts. To this point, the company has used outside suppliers for various key components of the company's yachts, including engines. Larissa has decided that East Coast Yachts should consider the purchase of an engine manufacturer to allow East Coast Yachts to better integrate its supply chain and get more control over engine features. After investigating several possible companies, Larissa feels that the purchase of Ragan Engines, Inc., is a possibility. She has asked Dan Ervin to analyze Ragan's value. Ragan Engines, Inc., was founded nine years ago by a brother and sisterCarrington and Genevieve Raganand has remained a privately owned company. The company manufactures marine engines for a variety of applications. Ragan has experienced rapid growth because of a proprietary technology that increases the fuel efficiency of its engines with very little sacrifice in performance. The company is equally owned by Carrington and Genevieve. The original agreement between the siblings gave each 150,000 shares of stock. sh Th Mini Case is c. Use the PE ratio to calculate the stock price when Boeing reaches a perpetual growth rate in dividends. Now find the value of the stock today finding the present value of the dividends during the supernormal growth rate and the price you calculated using the PE ratio. d. How sensitive is the current stock price to changes in PE ratio when the stock reaches the perpetual growth rate? Graph the current stock price against the PE ratio in 11 years to find out. https://www.coursehero.com/file/8394661/Corporate-Finance-Ross-Chapter9-Questions/ Chapter 9 305 Stock Valuation Larissa has asked Dan to determine a value per share of Ragan stock. To accomplish this, Dan has gathered the following information about some of Ragan's competitors that are publicly traded: Blue Ribband Motors Corp. Bon Voyage Marine, Inc. Nautilus Marine Engines Industry average EPS DPS Stock Price ROE R $1.09 1.26 (.27) $ .73 $.19 .55 .57 $.44 $16.32 13.94 23.97 $18.08 10.00% 12.00 N/A 11.00% 12.00% 17.00 16.00 15.00% is sh Th 1. Assuming the company continues its current growth rate, what is the value per share of the company's stock? 2. Dan has examined the company's financial statements, as well as examining those of its competitors. Although Ragan currently has a technological advantage, Dan's research indicates that Ragan's competitors are investigating other methods to improve efficiency. Given this, Dan believes that Ragan's technological advantage will last only for the next five years. After that period, the company's growth will likely slow to the industry average. Additionally, Dan believes that the required return the company uses is too high. He believes the industry average required return is more appropriate. Under Dan's assumptions, what is the estimated stock price? 3. What is the industry average price-earnings ratio? What is Ragan's price-earnings ratio? Comment on any differences and explain why they may exist. 4. Assume the company's growth rate declines to the industry average after five years. What percentage of the stock's value is attributable to growth opportunities? 5. Assume the company's growth rate slows to the industry average in five years. What future return on equity does this imply? 6. Carrington and Genevieve are not sure if they should sell the company. If they do not sell the company outright to East Coast Yachts, they would like to try and increase the value of the company's stock. In this case, they want to retain control of the company and do not want to sell stock to outside investors. They also feel that the company's debt is at a manageable level and do not want to borrow more money. What steps can they take to try and increase the price of the stock? Are there any conditions under which this strategy would not increase the stock price? https://www.coursehero.com/file/8394661/Corporate-Finance-Ross-Chapter9-Questions/ Powered by TCPDF (www.tcpdf.org) www.mhhe.com/rwj ar stu ed d vi y re aC s o ou urc rs e eH w er as o. co m Nautilus Marine Engines's negative earnings per share (EPS) were the result of an accounting write-off last year. Without the write-off, EPS for the company would have been $2.07. Last year, Ragan had an EPS of $5.35 and paid a dividend to Carrington and Genevieve of $320,000 each. The company also had a return on equity of 21 percent. Larissa tells Dan that a required return for Ragan of 18 percent is appropriate