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Financial Planning Problems

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Question;Problems;A.1?A.4 refer to the following table;A.1. What is the forward rate for year 2;(the forward rate quoted today for an investment that begins in one year and;matures in two years)?;A.2. What is the forward rate for year 3;(the forward rate quoted today for an investment that begins in two years and;matures in three years)? What can you conclude about forward rates when the;yield curve is flat?;When the yield curve is;flat (spot rates are equal), the forward rate is equal to the spot rate.;A.3. What is the forward rate for year 5;(the forward rate quoted today for an investment that begins in four years and;matures in five years)?.;A.4. Suppose you wanted to lock in an;interest rate for an investment that begins in one year and matures in five;years. What rate would you obtain if there are no arbitrage opportunities?;A.5. Suppose the yield on a one-year;zero-coupon bond is 5%. The forward rate for year 2 is 4%, and the forward rate;for year 3 is 3%. What is the yield to maturity of a zero-coupon bond that;matures in three years?;Lecture Seven - Valuing Stocks;9-1. Assume Evco, Inc., has a current;price of $50 and will pay a $2 dividend in one year, and its equity cost of;capital is 15%. What price must you expect it to sell for right after paying;the dividend in one year in order to justify its current price?;9-2. Anle Corporation has a current price of;$20, is expected to pay a dividend of $1 in one year, and its expected price;right after paying that dividend is $22.;a. What is Anle?s expected dividend yield?;b. What is Anle?s expected capital gain rate?;c. What is Anle?s equity cost of capital?;9-3. Suppose Acap Corporation will pay a;dividend of $2.80 per share at the end of this year and $3 per share next year.;You expect Acap?s stock price to be $52 in two years. If Acap?s equity cost of;capital is 10%;a. What price would you be willing to pay for;a share of Acap stock today, if you planned to hold the stock for two years?;b. Suppose instead you plan to hold the stock;for one year. What price would you expect to be able to sell a share of Acap;stock for in one year?;c. Given your answer in part (b), what price;would you be willing to pay for a share of Acap stock today, if you planned to;hold the stock for one year? How does this compare to you answer in part (a)?;9-4. Krell Industries has a share price of;$22 today. If Krell is expected to pay a dividend of $0.88 this year, and its;stock price is expected to grow to $23.54 at the end of the year, what is;Krell?s dividend yield and equity cost of capital?;9-5. NoGrowth Corporation currently pays a;dividend of $2 per year, and it will continue to pay this dividend forever.;What is the price per share if its equity cost of capital is 15% per year?;9-6. Summit;Systems will pay a dividend of $1.50 this year. If you expect Summit?s dividend to grow by 6% per year;what is its price per share if its equity cost of capital is 11%?;9-7. Dorpac Corporation has a dividend yield;of 1.5%. Dorpac?s equity cost of capital is 8%, and its dividends are expected;to grow at a constant rate.;a. What is the expected growth rate of;Dorpac?s dividends?;b. What is the expected growth rate of;Dorpac?s share price?;a;9-8. Kenneth Cole Productions (KCP);suspended its dividend at the start of 2009. Suppose you do not expect KCP to resume;paying dividends until 2011.You expect KCP?s dividend in 2011 to be $0.40 per;year (paid at the end of the year), and you expect it to grow by 5% per year;thereafter. If KCP?s equity cost of capital is 11%, what is the value of a;share of KCP at the start of 2009?;P;9-9. DFB, Inc., expects earnings this year;of $5 per share, and it plans to pay a $3 dividend to shareholders. DFB will;retain $2 per share of its earnings to reinvest in new projects with an;expected return of 15% per year. Suppose DFB will maintain the same dividend;payout rate, retention rate, and return on new investments in the future and;will not change its number of outstanding shares.;a. What growth rate of earnings would you;forecast for DFB?;b. If DFB?s equity cost of capital is 12%;what price would you estimate for DFB stock?;c. Suppose DFB instead paid a dividend of $4;per share this year and retained only $1 per share in earnings. If DFB;maintains this higher payout rate in the future, what stock price would you;estimate now? Should DFB raise its dividend?;9-10. Cooperton Mining just announced it will;cut its dividend from $4 to $2.50 per share and use the extra funds to expand.;Prior to the announcement, Cooperton?s dividends were expected to grow at a 3%;rate, and its share price was $50. With the new expansion, Cooperton?s;dividends are expected to grow at a 5% rate. What share price would you expect;after the announcement? (Assume Cooperton?s risk is unchanged by the new;expansion.) Is the expansion a positive NPV investment?.;9-11. Gillette Corporation will pay an annual;dividend of $0.65 one year from now. Analysts expect this dividend to grow at;12% per year thereafter until the fifth year. After then, growth will level off;at 2% per year. According to the dividend-discount model, what is the value of;a share of Gillette stock if the firm?s equity cost of capital is 8%?;9-12. Colgate-Palmolive Company has just paid;an annual dividend of $0.96. Analysts are predicting an 11% per year growth;rate in earnings over the next five years. After then, Colgate?s earnings are;expected to grow at the current industry average of 5.2% per year. If Colgate?s;equity cost of capital is 8.5% per year and its dividend payout ratio remains;constant, what price does the dividend-discount model predict Colgate stock;should sell for?;9-13. What is the value of a firm with initial;dividend Div, growing for nyears (i.e., until year n+ 1);at rate g1 and after that at rate g2;forever, when the equity cost of capital is r?;9-14. Halliford Corporation expects to have;earnings this coming year of $3 per share. Halliford plans to retain all of its;earnings for the next two years. For the subsequent two years, the firm will;retain 50% of its earnings. It will then retain 20% of its earnings from that point;onward. Each year, retained earnings will be invested in new projects with an;expected return of 25% per year. Any earnings that are not retained will be;paid out as dividends. Assume Halliford?s share count remains constant and all;earnings growth comes from the investment of retained earnings. If Halliford?s;equity cost of capital is 10%, what price would you estimate for Halliford;stock?;9-15. Suppose Cisco Systems;pays no dividends but spent $5 billion on share repurchases last year. If;Cisco?s equity cost of capital is 12%, and if the amount spent on repurchases;is expected to grow by 8% per year, estimate Cisco?s market capitalization. If;Cisco has 6 billion shares outstanding, what stock price does this correspond;to?

 

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