Stocks (Equity) Characteristics and Valuation
Problem 1: Express Surgery Center's (ESC) preferred stock, which has a par value equal to $110 per share, pays an annual dividend equal to 9% of the par value. If investors require a 15% return to purchase ESC's preferred stock, what is the stock's market value?
Problem 2: The Ape Copy Company's preferred stock pays an annual dividend equal to $16.50. If investors demand a return equal to 11% to purchase Ape's preferred stock, what is its market value?
Problem 3: Since it started business 10 years ago, Alphafem Company has paid a constant $1.20 per share dividend to its common stockholders. Next year and every year thereafter, the company plans to increase the dividend at a constant rate equal to 2.5% per year. If investors require a 15% rate of return to purchase Alphafem's common stock, what is the market value of its common stock?
Problem 4: Suppose your company is expected to grow at a constant rate of 6% long into the future. In addition, its dividend yield is expected to be 8%. If your company expects to pay a dividend equal to $1.06 per share at the end of the year, what is the value of your firm's stock?
Problem 5: Georgetown Motorcars' (GM) common stock normally sells for 19 times its earnings; that is, its P/E ratio equals 19. If GM's earnings per share are $3.70, what should be its stock price under normal circumstances?
Problem 6: For the past 15 years, the P/E ratio of North/South Travel has been between 28 and 30. If North/South's earnings per share equal $4, in what price range would you estimate its stock should be selling?
Problem 7: RJS generated $65,000 net income this year. The firm's financial statements also show that its interest expense was $40,000, its marginal tax rate was 35%, and its invested capital was $800,000. If its average cost of funds is 12%, what was RJS's economic value added (EVA) this year?
Problem 8: Backhaus Beer Brewers (BBB) just announced that the current fiscal year's net income was $1.2 million. BBB's marginal tax rate is 40%, its interest expense for the year was $1.5 million, it has $8 million invested capital, and its average cost of funds was 10%. What is BBB's economic value added (EVA) for the current year?