19 Jul Corporate Finance Excel spread sheet problem sets
1. What is the price of a stock today if the most recent dividend was $2.00 and the dividend is expected to grow by 4% per year. Assume that the required rate of return on the stock is 13.5%. $21.89
2. What is the price of a stock today if the dividend to be paid a year from now is $3.00 and the dividend is expected to decline by 10% per year indefinitely. Assume that the discount rate is 8.9% for the stock. $15.87
3. A preferred stock pays a dividend of $2.50 per year. It is currently priced at $19.55. What is the rate of return for this preferred stock? 12.53%
4. A stock just paid a dividend of $1.00. It is expected to grow by 20% for 3 years, and then grow at a sustainable rate of 5% per year thereafter. If the discount rate is 10%, determine what the price of the stock should be today. $30.84
5. Amon Inc just paid a dividend of $1.95 per share on its stock. The dividends are expected to grow at a constant rate of 4.1% per year, indefinitely. If investors expect a 10.2% return on this stock . . .
What is the current price? 33.28
What will the price be in 3 years? 37.54
What will the price be in 15 years? 60.80
6. Raffalovich, Inc. is expected to maintain a constant 4.9% growth rate on its dividends forever. If the company has a dividend yield of 5.7%, what is the required rate of return on its stock? 10.6%
7. Bui Corp pays a constant $12 dividend on its stock. The company will maintain this dividend for the next 9 years and then will cease paying dividends forever. If the required rate of return on this stock is 10%, what is the current price? 69.11
8. Metallica Bearings, Inc is a young start-up company. No dividends will be paid on the stock over the next 9 years, because the firm needs to use its earnings to feed growth. The company is then expected to pay a $15 dividend (10 years from today), which will grow by 5% per year thereafter. If the required rate of return for the stock is 14%, what is the current price? 51.25
9. Apocalyptica Corp is expected to pay the following dividends over the next 4 years: $3, $10, $15, $3.08. Afterwards, the company is promising to maintain a constant 5% growth rate in dividends. If the required rate of return for the stock is 11%, what is the current price? 59.32
Part 2: Risk Problems.
1. What are the portfolio weights for a portfolio consisting of three stocks: Stock A – 140 shares priced at $45 per share; Stock B – 210 shares priced at $38 per share; Stock C – 80 shares priced at $66 per share. [32.2%, 40.8%, 27.0%]
2. What is the portfolio expected return on the above portfolio if the expected return on Stocks A, B and C are 13%, 9% and 22% respectively? [13.80%]
3. You have $10,000 to invest in a portfolio and you are considering two stocks (X, Y). You want to create a portfolio with an expected return of 12.4%. How much will you invest in each of the stocks if the expected return on X is 14% and the expected return on Y is 11%? [46.67% in X; 53.33% in Y]
4. Calculate the expected returns and the standard deviations for Stocks A and B based on the following information: [10.3%, 4.12% for A; 14.7%, 19.63% for B]
| State of Economy | Probability | Stock A Return | Stock B Return |
| Recession | 15% | 2.0% | -30.0% |
| Normal | 55% | 10.0% | 18.0% |
| Boom | 30% | 15.0% | 31.0% |
5. Using the information above what is the expected return and standard deviation for a portfolio that is equally weighted (i.e. equal parts A & B)? [12.5%, 11.82%]
6. What is the portfolio beta based on the information below: (1.231)
| Stock | Weight | Beta |
| A | 15% | 0.85 |
| B | 25% | 0.91 |
| C | 40% | 1.31 |
| D | 20% | 1.76 |
7. Using the information above, what is the expected return on the portfolio if the risk free rate is 3.5% and the expected return on the market is 11.2%? [12.979%]
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