Problem Set on Stock Valuation 1. Thomas Brothers is expected to pay a $0.50 per share dividend at the end of the year (i.e., Di-$0.50). The dividend is expected to grow at a constant rate of 7 percent a year. The required rate of return on the stock, r, is 15 percent. What is the value per share of the company's stock? 2. Harrison Clothiers' stock currently sells for $20 a share. The stock just paid a dividend of $1.00 a share (i.e., Do-$1.00). The divided is expected to grow at a constant rate of 10 percent a year a. What is the required rate of return on the company's stock? b. What stock price is expected 1 year from now? 3. Fee Founders has preferred stock outstanding that pays a dividend of $5 at the end of each year. The preferred stock sells for $60 a share. What is the preferred stock's required rate of return? 4. The risk-free rate of return, rRF, is 11 percent; the required rate of return on the market, rM, is 14 percent; and Upton Company's stock has a beta coefficient of 1.. a. If the dividend expected during the coming year, D, is S2.25, and if g-5%, at what price should Upton's stock sell? b. Now, suppose the Federal Reserve Board increases the money supply, causing the risk-free rate to drop to 9 percent and r to fall to 12 percent. What would this do to the price of the stock? c. In addition to the change in part b, suppose investors' risk aversion declines; this fact, combined with the decline in TRF, causes rM to fall to 11 percent. At what price Upton stocks sell? d. Now, suppose Upton has a change in management. The new group institutes policies that increase the expected constant growth rate to 6 percent. Also, the new management stabilizes sales and profits, and thus causes the beta coefficient to decline from 1.5 to 1.3. Assume that TRF and rM are equal to the values in part c. After all these changes, what is Upton's new equilibrium price? (Note: Di is now $2.27)