Gitman_286618_IM_ch07
P7-7. Business finance / stock valuation (3)
Stock when purchased $31.25
Stock when sold 41.67
Capital gain 10.42
P7-14. LG 4: Common stock value–variable growth (3)
Challenge
a. Calculator solution: $44.79
b. Calculator solution: $25.72
c. Calculator solution: $254.54
P7-19. Business finance / stock valuation (2)
|Firm |EPS ( P/E |’ |Stock Price |
|A |3.0 ( (6.2) |’ |$18.60 |
|B |4.5 ( (10.0) |’ |$45.00 |
P7-22. LG 4: 6: Integrative–risk and valuation (4)
Challenge
a.
rs ’ 0.148
b.
g ’ approximately 6%
Calculator solution: $29.55
c. A decrease in beta would decrease the required rate of return, which in turn would increase the price of the stock.
P7-23 LG 4, 6: Integrative–valuation and CAPM (5)
Challenge
a. g ’ approximately 7%
rs ’ 0.14
Calculator solution: $52.77
b. (1) Calculator solution: $40.25
(2) Calculator solution: $61.60
The CAPM supplies an estimate of the required rate of return for common stock. The resulting price per share is a result of the interaction of the risk-free rate, the risk level of the security, and the required rate of return on the market. For Craft, the lowering of the dividend growth rate reduced future cash flows resulting in a reduction in share price. The decrease in the beta reflected a reduction in risk leading to an increase in share price.
WEB exercise Chapter 7
Go to the yahoo finance
Enter your company name or ticker symbol.
1) Go to Company Reports and then to estimates.
a) Estimates (5)
List at least 3 of the estimates from this source
Compare to estimates in chapter 3. Are there any discrepancies?
1) Analyst recommendations (3)
a. What are the analysts saying about this company
3) Insiders (3)
a) Who are the major holders of the company’s equity
b) what percentage of the company is held by people?
c) What institution holds the most stock?
4) Calculate the value of your company’s stock. Include the calculations for growth of dividends and the calculation for the required return using the SML.
This may take some extra work with the instructor. (10)
What you need:
Beta
Dividends for the last 5 years
Yield on 30 year T-Bond
Estimate of the avg return on the stock market
PE ratio
Estimate of the EPS for the next year (or the growth of EPS)
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