8-1A. (Preferred

Stock Valuation) What is the value of a preferred stock where the dividend

rate is 16 percent on a $100 par value? The appropriate discount rate for a

stock of this risk level is 12 percent.

8-2A. (Preferred

Stockholder Expected Return) Shewmaker’s preferred stock is selling for

$55.16 and pays $2.35 in dividends. What is your expected rate of return if you

purchase the security at the market price?

8-3A. (Preferred

Stockholder Expected Return) You own 250 shares of McCormick Resources’

preferred stock, which currently sells for $38.50 per share and pays annual

dividends of $3.25 per share.

a. What is your expected return?

b. If you require an 8 percent return,

given the current price, should you sell or buy more stock?

8-4A. (Common

Stock Valuation) You intend to purchase Bama, Inc., common stock at $52.75

per share, hold it one year, and sell after a dividend of $6.50 is paid. How

much will the stock price have to appreciate if your required rate of return is

16 percent?

8-5A. (Common

Stockholder Expected Return) Blackburn & Smith’s common stock currently

sells for $23 per share. The company’s executives anticipate a constant growth

rate of 10.5 percent and an end-of-year dividend of $2.50.

a. What is the expected rate of return if

you buy the stock for $23?

b. If you require a 17 percent return,

should you purchase the stock?

8-6A. (Common

Stock Valuation) Gilliland Motor, Inc., paid a $3.75 dividend last year. At

a constant growth rate of 6 percent, what is the value of the common stock if

the investors require a 20 percent rate of return?

8-7A. (Measuring

Growth) Given that a firm’s return on equity is 24 percent and management

plans to retain 60 percent of earnings for investment purposes, what will be

the firm’s growth rate?

8-8A. (Common

Stockholder Expected Return) The common stock of Bouncy-Bob Moore Co. is

selling for $33.84. The stock recently paid dividends of $3 per share and has a

projected constant growth rate of 8.5 percent. If you purchase the stock at the

market price, what is your expected rate of return?

8-9A. (Common

Stock Valuation) Honeybee common stock is expected to pay $1.85 in

dividends next year, and the market price is projected to be $40 by year end.

If the investor’s required rate of return is 12 percent, what is the current

value of the stock?

8-10A. (Common

Stock Expected Rate of Return) The market price for M. Simpson & Co.’s

common stock is $44. The price at the end of one year is expected to be $47,

and dividends for next year should be $2. What is the expected rate of return?

8-11A. (Preferred

Stock Valuation) Gree’s preferred stock is selling for $35 in the market

and pays a $4 annual dividend.

a. What is the expected rate of return of

the stock?

b. If an investor’s required rate of

return is 10 percent, what is the value of the stock for the investor?

c. Should the investor acquire the stock?

8-12A. (Common

Stock Valuation) The common stock of KPD paid $1 in dividends last year.

Dividends are expected to grow at an 8 percent annual rate for an indefinite

number of years.

a. If KPD’s current market price is $25,

what is the stock’s expected rate of return?

b. If your required rate of return is 11

percent, what is the value of the stock for you?

c. Should you make the investment?

8-13A. (Comprehensive

Problem in Valuing Securities) You are considering three investments. The

first is a bond that is selling in the market at $1,200. The bond has a $1,000

par value, pays interest at 14 percent, and is scheduled to mature in 12 years.

For the bonds of this risk class you believe that a 12 percent rate of return

should be required. The second investment that you are analyzing is a preferred

stock ($100 par value) that sells for $80 and pays an annual dividend of $12.

Your required rate of return for this stock is 14 percent. The last investment

is a common stock ($35 par value) that recently paid a $3 dividend. The firm’s

earnings per share have increased from $4 to $8 in 10 years, which also

reflects the expected growth in dividends per share for the indefinite future.

The stock is selling for $25, and you think a reasonable required rate of

return for the stock is 20 percent.

a. Calculate the value of each security

based on your required rate of return.

b. Which investment(s) should you accept?

Why?

c. 1. If

your required rates of return changed to 14 percent for the bond, 16 percent

for the preferred stock, and 18 percent for the common stock, how would your

answers change to parts (a) and (b)?

2. Assuming

again that your required rate of return for the common stock is 20 percent, but

the anticipated constant growth rate changes to 12 percent, would your answers

to parts (a) and (b) be different?

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