COMMON STOCKS VALUATION

1. The Kong Skull Company most recent dividend was RM2.50 and this dividend is expected
to grow at 5% year 1; 4% year 2; 5% year 3; 3% year 4 and 5% year 5.After year 5, the
dividend growth rate is expected to increase to 6% per year indefinitely. What is the value
of the stock if the required rate of return is 8%? (Answer: RM123.15)
2. The most recent dividend of KT shares was RM2.50 and expected to grow at 3 percent
every year for the next 2 years. After which, the dividend will grow at 6 percent every year
indefinitely. Assuming 10 percent required rate of return, what is the value of KT’s share?
(Answer: RM62.62)
3. En Kay Berhad (EKB) has an expected dividend next year of RM5.60 per share. The
dividend is expected to grow at 10 percent for an unforeseeable future. What is the value
of EKB common stock if the required return is 20 percent? (Answer: RM56)
4. The current dividend yield on ABC common stock is 2.5 percent. The company just paid a
RM1.48 annual dividend and announced plans to pay RM1.54 next year. The dividend
growth rate is expected to remain constant at the current level. What is the expected rate of
return on this stock? (Answer: 6.554%)
5. The current dividend on a stock is $2 per share and investors require a rate of return of
12%. Dividends are expected to grow at a rate of 3% in year 1; 6% in year 2; 4% in
year 3 and then at a rate of 5% per year forever. Find the price of the stock. (Answer:
$29.44)
6. A stock with a required rate of return of 10 percent sells for $30 per share. The stock’s
dividend is expected to grow at a constant rate of 7 percent per year. What is the expected
year- end dividend, D1, on the stock? (Answer: $0.90)
7. Allegheny Publishing’s stock is expected to pay a year-end dividend, D1, of $4.00. The
dividend is expected to grow at a constant rate of 8 percent per year, and the stock’s
required rate of return is 12 percent. Given this information, what is the expected price of
the stock, eight years from now? (Answer: $185.09)
8. Antiques ‘R’ Us is a mature manufacturing firm. The company just paid a $7 dividend,
but management expects to reduce the payout by 5 percent per year, indefinitely. If you
require a10 percent return on this stock, what will you pay for a share today? (Answer:
$44.33)
9. Barnard Corp. will pay a dividend of $3.05 next year. The company has stated that it will
maintain a constant growth rate of 5 percent a year forever.

a. How much will you pay for the stock if a required rate of return is 15%? (Answer:
$30.5)

b. What if you want a 10 percent rate of return? (Answer: $61)

c. What does this tell you about the relationship between the required return and the
stock price? (Answer: Price is inversely related with return)
10. A stock you are evaluating paid a dividend at the end of last year of $3.50. Dividends
have grown at a constant rate of 2 percent per year over the last 20 years, and this
constant growth rate is expected to continue into the future. The required rate of return on
the stock is 10 percent. What is the price for the stock? (Answer: $44.63)

11. Stability Inc. Has maintained a dividend rate of $4.50 pershare for many years. The
same rate is expected to be paid in future years. If investors require an 11% rate of return
on similar investments, determine the present value of the company’s stock. (Answer:
$40.91)

12. Cosy Bhd common stock has just paid a dividend of RM1.32 and is expected to grow
indefinitely at an annual 7 percent rate. What is the value of the stock if you require an
11 percent return? (Answer: $35.31)

13. Black & White Co. Common stock currently sells for RM23 per share. The company’s
executives anticipate a constant growth rate of 10.5 percent and an end of year dividend
of RM2.50.

a. What is your expected rate of return? (Answer: R=21.37%)

b. If you require a17 percent return, will you purchase the stock? Why? (Answer: Yes as
the stock is giving a higher return than what I required)
 PREFERRED STOCKS VALUATION

1. Mr. D recently purchased a block of 100 shares of Pak Atan’s Farming Corporation
preferred stocks for RM6,000. The stocks are expected to provide an annual cash flow of
dividends of RM400. Did Mr. D make a right choice by purchasing these stocks if the
required rate of return is 8 percent?

2. Greenfield Inc.’s preferred stock is currently selling for RM25 per share. If the company
promises to pay RM3 annual dividends, what is your expected return from the purchase of
this stock?

3. If Talita Corporation’s preferred stock pays quarterly dividends of RM2.50 and your
required rate of return for this investment is 12 percent, how much would you be willing to
pay for this preferred stock?

4. Whatisthevalueofapreferredstockwherethedividendrateis16percentonaRM100par value?
The appropriate discount rate forastock ofthis risk level is 12 percent.

5. Youown250sharesofDaltaBhd’spreferredstock,whichiscurrentlysellingforRM38.50 per
share and pays quarterlydividend ofRM1.25per share.
a. What is the expected rateof return?

b. Ifyourequirean8percentreturn,willyoubuymorestockorsellthestock,giventhe current
price?Why?

6. Youareconsideringapreferredstockwherethedividendis14percentonaRM100par value.
Calculatethefollowing.

a. The fair value ofthe preferred stock ifyou requirea return

b. The expected rate ofreturn if the current market priceis M189.80.