FINC 425 Study Guide - Final Guide: Total Return, Preferred Stock, Market Risk

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silverhorse264

30 Oct 2014

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The exam will be in the form of multiple-choice questions only. There are 25 questions and 4 points each. The exam will cover chapter 10, 11, 12 and 17. Chapter 10: understand that the value of any asset is the present value of all the future expected cash flows. The value of any asset depends on the amount, timing, riskiness of the cash flows. V= cft/(1+k)^t k is the appropriate discount rate: dividend discount model (ddm) - used for valuing the equity of the firm. Ddm- value of a stock is the present value of the future dividends expected to be generated by the stock po= d1/(1+rs)^1 dn/(1+rs)^n. The ddm is operationalized by estimating the expected growth rate in the dividend stream: zero-growth rate model- assume no growth in dividends, fixed dollar amount of dividends reduces the security to a perpetuity po/vo=do/k.

Related Questions

M12-22. Estimating Weighted Average Cost of Capital. Assume that a company has $1 billion in preferred stock and $3 billion in common stock. Also, it pays 6% dividends on preferred stock and its cost of equity capital is 7%. The company has no debt. Compute the companyâs WACC.

M12-23. Estimating Company Value Using DDM with Constant Perpetuity. Assume that a companyâs dividends per share are projected to remain at $1.20 each year, and that its cost of equity capital is 5%. Estimate the companyâs per share stock price.

M12-25. Estimating Company Value Using DDM with Increasing Perpetuity. Assume that a companyâs dividends per share are projected to grow at 2% each year, its next yearâs dividends per share is $1.20, and its cost of equity capital is 5%. Estimate the companyâs per share stock price.

M12-26. Estimating Company Value Using DDM with Increasing Perpetuity. Assume that a company paid $1.20 dividend per common share, its dividend per share is expected to grow at a constant rate of 2%, and its cost of equity capital is 5%. Estimate the companyâs per share stock price.

8. The FI Corporation's dividends per share are expected to grow indefinitely by 8% per year.

a. If this year's year-end dividend is $11.00 and the market capitalization rate is 15% per year, what must the current stock price be according to the DDM? (Round your answer to 2 decimal places. Omit the "$" sign in your response.)

Current stock price $_____ ??

b. If the expected earnings per share are $10.00, what is the implied value of the ROE on future investment opportunities? (Round your answer to 1 decimal place. Omit the "%" sign in your response.)

Value of ROE ______% ??

c. How much is the market paying per share for growth opportunities (i.e., for an ROE on future investments that exceeds the market capitalization rate)? (Negative amount should be indicated by a minus sign. Round your answer to 2 decimal places. Omit the "$" sign in your response.)

Amount $ _____ per share ??

mauveantelope612

Can you explain in simple and detail on what is stock valuation?

So far I have these points taken down but don't know the meaning to it

Value of a share of stock > the present value of its expected future cash flow

Cash Dividends paid (If any)

Future Selling Price of the Stock

The discount rate, i.e., risk-appropriate rate of return to be earned on the investment

FINC 425 Study Guide - Final Guide: Total Return, Preferred Stock, Market Risk

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