Molen Inc. has an outstanding issue of perpetual preferred stock with an annual

Question

Molen Inc. has an outstanding issue of perpetual preferred stock with an annual dividend of $2.50 per share. If the required return on this preferred stock is 6.5%, at what price should the stock sell?
Answer
a. $30.00
b. $46.54
c. $41.54
d. $38.46
e. $44.23

Question 18

You must estimate the intrinsic value of Noe Technologies’ stock. The end-of-year free cash flow is expected to be $24.00 million, and it is expected to grow at a constant rate of 7.0% a year thereafter. The company’s WACC is 10.0%, it has $125.0 million of long-term debt plus preferred stock outstanding, and there are 15.0 million shares of common stock outstanding. What is the firm's estimated intrinsic value per share of common stock?
Answer
a. $36.90
b. $45.00
c. $48.15
d. $34.20
e. $45.45

Question 19

Nachman Industries just paid a dividend of $4.75. Analysts expect the company's dividend to grow by 30% this year, by 10% in Year 2, and at a constant rate of 5% in Year 3 and thereafter. The required return on this low-risk stock is 9.00%. What is the best estimate of the stock’s current market value?
Answer
a. $161.46
b. $150.15
c. $132.39
d. $196.98
e. $175.99

Question 20

The Ramirez Company has just paid a dividend of $1.75. Its dividend growth rate is expected to be constant at 15% for 2 years, after which dividends are expected to grow at a rate of 6% forever. Its required return (r) is 12%. What is the best estimate of the current stock price?
Answer
a. $42.76
b. $36.24
c. $38.77
d. $36.60
e. $39.14

Explanation / Answer

a) Calculating the price of the preferred stock: Kp = D / P0 But Kp = 6.5%       D = $2.50                                                   P0 = D / Kp                                                        = $2.5 / 0.065                                                        = $38.46 The correct option is d) $38.46 b) The intrinsic value is calculated as           TV = Free cash flows at the end of the year (1 + g) / (WACC - g)                 = $24,000,000 (1 + 0.07) / (0.10 - 0.07)                 = $856,000,000 Debt + Preferred stock = $125,000,000 Terminal value - (Debt + Preferred stock) = Value of common stock $856,000,000 - $125,000,000 = $731,000,000 Value per share = $731,000,000 / 15,000,000                          = $48.15 Correct option is c) $48.15 c) According to the given information, D0 = $4.75 D1 = $4.75 (1.30)      = $6.175 D2 = $6.175 (1.1)       = $6.8 D3 = $6.8 (1.05)       = $7.14 Calculating the price in Year-3: P2 = D3 / (R-g)      = $7.14 / (0.09 - 0.05)      = $7.14 / 0.04      = $178.5 P0 = D1 / (1+R) + D2 / (1+R)^2 + P2 / (1+R)^2      = $6.175 / 1.09 + $6.8 / 1.188 + $178.5 / 1.188      = $5.66 + $5.72 + $150.25      = $161.46 Correct option is a) $161.46 d) Calculating the Stock price: D0 = $1.75 For the first 2 yrs, the growth rate is 15% and thereafter the growth rate is 6% for ever. D1 = D0 (1 + 0.15)       = $1.75 (1.15)       = $2.0125 D2 = D1 ( 1.15)      = $2.314 Where P2 = D3 / (R-g2)                = $2.314 * (1.06) / (0.12 - 0.06)                = $2.45 / 0.06                = $40.83 P0 =  D1 / (1+R) + D2 / (1+R)^2 + P2 / (1+R)^2      = $2.0125 / 1.12 + $2.314 / 1.2544 + $40.83 / 1.2544      = $1.796 + $1.844 + $32.55      = $36.24 Correct option is b) $36.24 D0 = $1.75 For the first 2 yrs, the growth rate is 15% and thereafter the growth rate is 6% for ever. D1 = D0 (1 + 0.15)       = $1.75 (1.15)       = $2.0125 D2 = D1 ( 1.15)      = $2.314 Where P2 = D3 / (R-g2)                = $2.314 * (1.06) / (0.12 - 0.06)                = $2.45 / 0.06                = $40.83 P0 =  D1 / (1+R) + D2 / (1+R)^2 + P2 / (1+R)^2      = $2.0125 / 1.12 + $2.314 / 1.2544 + $40.83 / 1.2544      = $1.796 + $1.844 + $32.55      = $36.24 Correct option is b) $36.24 D0 = $1.75 For the first 2 yrs, the growth rate is 15% and thereafter the growth rate is 6% for ever. D1 = D0 (1 + 0.15)       = $1.75 (1.15)       = $2.0125 D2 = D1 ( 1.15)      = $2.314 Where P2 = D3 / (R-g2)                = $2.314 * (1.06) / (0.12 - 0.06)                = $2.45 / 0.06                = $40.83 P0 =  D1 / (1+R) + D2 / (1+R)^2 + P2 / (1+R)^2      = $2.0125 / 1.12 + $2.314 / 1.2544 + $40.83 / 1.2544      = $1.796 + $1.844 + $32.55      = $36.24 Correct option is b) $36.24                = $40.83 P0 =  D1 / (1+R) + D2 / (1+R)^2 + P2 / (1+R)^2      = $2.0125 / 1.12 + $2.314 / 1.2544 + $40.83 / 1.2544      = $1.796 + $1.844 + $32.55      = $36.24 Correct option is b) $36.24

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