Finance homework 3



Finance homework 3


3. Jersey Mining earns $9.50 a share, sells for $90, and pays a $6 per share
dividend. The stock is split two for one and a $3 per share cash dividend is
a. What will be the new price of the stock?
b. If the firm’s total earnings do not change, what is the payout
ratio before and after the stock split?

4. Firm A had the following selected items on its
balance sheet:
Cash $ 28,000,000
Common stock ($50 par; 2,000,000 shares outstanding) 100,000,000
Additional paid-in capital 10,000,000
Retained earnings 62,000,000

How would each of these accounts appear after:
a. a cash dividend of $1 per share?
b. a 5 percent stock dividend (fair market value is $100 per share)?
c. a one-for-two reverse split?

5. Jackson Enterprises has the following capital (equity) accounts:
Common stock ($1 par; 100,000 shares outstanding) $100,000
Additional paid-in capital 200,000
Retained earnings 225,000
The board of directors has declared a 20 percent stock dividend on January 1
and a $0.25 cash dividend on March 1. What changes occur in the capital
accounts after each transaction if the price of the stock is $4?

7. What effect will a two-for-one
stock split have on the following items found on a firm’s financial statements?

1. earnings per share $4.20 2.
total equity $10,000,000
3. long-term debt $4,300,000 4.
additional paid-in capital $1,534,000
5. number of shares outstanding 1,000,000 6. earnings

Chapter 11
1. The dividend-growth model may be used to value a stock:

What is the value of a stock if:

a. What is the value of this stock if the dividend is
increased to $3 and the other variables remain constant?
b. What is the value of this stock if the
required return declines to 7.5 percent and the other variables remain
c. What is the value of this stock if the growth rate
declines to 4 percent and the other variables remain constant?
d. What is the value of this stock if the dividend is increased to $2.30, the
growth rate declines to 4 percent, and the required return remains 10 percent?

2 Last year Artworks, Inc. paid a dividend of $3.50. You anticipate that the
company’s growth rate is 10 percent and have a required rate of return of 15
percent for this type of equity investment. What is the maximum price you would
be willing to pay for the stock?

3. An investor with a required return of 14 percent
for very risky investments in common stock has analyzed three firms and must
decide which, if any, to purchase. The information is as follows:Firm

Earnings $2.00 $3.20 $7.00

dividend $1.00 $3.00 $7.50

Expected annual growth in dividends and
earnings 7% 2% -1%

Current market
price $23 $47 $60

a. What is the maximum price that the investor should pay for
each stock based on the dividend-growth model?
b. If the investor does buy stock A, what is the implied
percentage return?
c. If the appropriate P/E ratio is 12, what is the maximum
price the investor should pay for each stock? Would your answers be different
if the appropriate P/E were 7?
d. What does stock C’s negative growth rate imply?

5. Jersey Jewel Mining has a beta coefficient of 1.2. Currently the risk-free rate
is 5 percent and the anticipated return on the market is 11 percent. JJM pays a
$4.50 dividend that is growing at 6 percent annually.
a. What is the required return for JJM?
b. Given the required return, what is the value of the stock?

c. If the stock is selling for $80, what should you do?
d. If the beta coefficient declines to 1.0, what is the new
value of the stock?
e. If the price remains $80, what course of action should you
take given the valuation in (d)?

Chapter 14
1. Big Oil Inc. has a preferred stock outstanding that pays a $9 annual
dividend. If investors’ required rate of return is 13 percent, what is the
market value of the shares? If the required return declines to 11 percent, what
is the change in the price of the stock?

2. What should be the prices of the following
preferred stocks if comparable securities yield 7 percent? Why are the
valuations different?
1. MN Inc., $8 preferred ($100 par)
2. CH Inc., $8 preferred ($100 par) with mandatory retirement
after 20 years

4. You are considering purchasing the preferred stock of a firm but are
concerned about its capacity to pay the dividend. To help allay that fear, you
compute the times-preferred-dividend-earned ratio for the past three years from
the following data taken from the firm’s financial
Year X1 X2 X3

Income 12000000 15000000 17000000

Interest 3000000 5900000 11000000

Taxes 4000000 5400000 4000000

Preferred dividends 1000000 1000000 1500000

dividends 3000000 2000000 –

What does your analysis indicate about the firm’s capacity to pay preferred
stock dividends?


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