Problem 7-3 Constant Growth Valuation Woidtke Manufacturing’s stock currently sells for $21 a share. The stock just paid a dividend of $4.00 a share (i.e., D0 = $4.00), and the dividend is expected to grow forever at a constant rate of 6% a year. What stock price is expected 1 year from now? Round your answer to the nearest cent. ___$ What is the estimated required rate of return on Woidtke’s stock? Round the answer to three decimal places. _____ %

Problem 7-4 Preferred Stock Valuation Nick’s Enchiladas Incorporated has preferred stock outstanding that pays a dividend of $3 at the end of each year. The preferred sells for $45 a share. What is the stock’s required rate of return (assume the market is in equilibrium with the required return equal to the expected return)? Round the answer to two decimal places. %

Problem 7-6 Value of Operations of Constant Growth Firm EMC Corporation has never paid a dividend. Its current free cash flow of $370,000 is expected to grow at a constant rate of 5.5%. The weighted average cost of capital is WACC = 13.75%. Calculate EMC’s estimated value of operations. Round your answer to the nearest dollar. $

Pblem 7-7 Horizon Value Current and projected free cash flows for Radell Global Operations are shown below. Actual 2013 2014 Projected 2015 2016 Free cash flow $601.96 $662.64 $702.69 $758.91 (millions of dollars) Growth is expected to be constant after 2015, and the weighted average cost of capital is 11.8%. What is the horizon (continuing) value at 2016 if growth from 2015 remains constant? Round your answer to the nearest dollar. Round intermediate calculations to two decimal places. $

Problem 7-10 Preferred Stock Rate of Return What is the required rate of return on a preferred stock with a $50 par value, a stated dividend of 7% of par, and a current market price of (a) $50, (b) $86, (c) $107, and (d) $131 (assume the market is in equilibrium with the required return equal to the expected return)? Round the answers to two decimal places. a % b % c % d %

Problem 7-11 Declining Growth Stock Valuation Brushy Mountain Mining Company’s coal reserves are being depleted, so its sales are falling. Also, environmental costs increase each year, so its costs are rising. As a result, the company’s earnings and dividends are declining at the constant rate of 7% per year. If D0 = $4 and rs = 18%, what is the value of BrushyMountain’s stock? Round your answer to the nearest cent. $

Pblem 7-17 Value of Operations Kendra Enterprises has never paid a dividend. Free cash flow is projected to be $80,000 and $100,000 for the next 2 years, respectively; after the second year, FCF is expected to grow at a constant rate of 5%. The company’s weighted average cost of capital is 18%. What is the terminal, or horizon, value of operations? (Hint: Find the value of all free cash flows beyond Year 2 discounted back to Year 2.) Round your answer to the nearest cent. $ Calculate the value of Kendra’s operations. Round your answer to the nearest cent. Round intermediate calculations to two decimal places. $

Problem 7-19

Constant Growth Stock Valuation

You are analyzing Jillian’s Jewelry (JJ) stock for a possible purchase. JJ just paid a dividend of $1.00 yesterday. You expect the dividend to grow at the rate of 4% per year for the next 3 years, if you buy the stock; you plan to hold it for 3 years and then sell it.

What dividends do you expect for JJ stock over the next 3 years? In other words, calculate D1, D2 and D3. Note that D0 = $1.00. Round your answers to the nearest cent.

JJ’s stock has a required return of 11%, and so this is the rate you’ll use to discount dividends. Find the present value of the dividend stream; that is, calculate the PV of D1, D2, and D3, and then sum these PVs. Round your answer to the nearest cent.

JJ stock should trade for $16.71 3 years from now (i.e., you expect = $16.71). Discounted at a 11% rate, what is the present value of this expected future stock price? In other words, calculate the PV of $16.71. Round your answer to the nearest cent.

If you plan to buy the stock, hold it for 3 years, and then sell it for $16.71, what is the most you should pay for it? Round your answer to the nearest cent.

use the constant growth model to calculate the present value of this stock. Assume that g = 4%, and it is constant. Round your answer to the nearest cent.

Is the value of this stock dependent on how long you plan to hold it? In other words, if your planned holding period were 2 years or 5 years rather than 3 years, would this affect the value of the stock today, ? Explain your answer.