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# Finance Questions - Stock Price, Dividend Discount Model

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1. Over the past 5 years, NBA's common stock earnings per share have grown from \$0.62 to \$0.91. If an investor is NBA stock is assumed to have a required rate of return of 14%, what is the current value of NBA if its current dividend is 0.12? Assume EPS will continue to grow at a constant rate.

2. Morton Industries' common stock sells for \$54. Dividends are expected to continue to grow at a rate of 8% annually. If investors in Morton require a 13% rate of return, what is the current dividend?

3.Over the past 10 years the dividends of Allegro have grown from \$0.45 to \$1.82 per share. Determine the value of Allegro's common stock to an investor who requires a 20% rate of return, assuming that dividends continue growing at the same rate as they grew over the past 10 years.

4.The State of Adaven issued \$50 million of perpetual bonds in 1990. The bonds were issued in \$100 denominations with an annual coupon interest rate of 5%. Determine the value of these bonds today to an investor who requires a 10% return on his investment

5. Determine the yield-to-call (to nearest 0.1 of a percent) of an LTV bond with a 14 percent coupon, that pays interest semiannually. The bond can be called in 7 years, has a call premium of \$140, and is currently selling for \$1154.

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The solution answers question related to Stock Price, Dividend Discount Model.

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## Fin410 (Risk and Capital)

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By walking you through a set of financial data for IBM, this assignment will help you better understand how theoretical stock prices are calculated; and how prices may react to market forces such as risk and interest rates. You will use both the CAPM (Capital Asset Pricing Model) and the Constant Growth Model (CGM) to arrive at IBM's stock price. To get started, complete the following steps.
1. Find an estimate of the risk-free rate of interest, krf. To obtain this value, go to Bloomberg.com: Market Data [http://www.bloomberg.com/markets/index.html] and use the "U.S. 10-year Treasury" bond rate as the risk-free rate. In addition, you also need a value for the market risk premium. Use an assumed market risk premium of 7.5%.
2. Download this IBM Stock Information document (.pdf file). Please note that the following information contained in this document must be used to complete the subsequent questions.
1. IBM's beta (à?)
2. IBM's current annual dividend
3. IBM's 3-year dividend growth rate (g)
4. Industry P/E
5. IBM's EPS.
3. With the information you now have, use the CAPM to calculate IBM's required rate of return or ks.
4. Use the CGM to find the current stock price for IBM. We will call this the theoretical price or Po.
5. Now use appropriate Web resources to find IBM's current stock quote, or P. Compare Po and P. Do you see any differences? Can you explain what factors may be at work for such a difference in the two prices? This section is especially important - with more weight in grading - so you may want to do some study before answering such a question. Explain your thoughts clearly.
6. Now assume the market risk premium has increased from 7.5% to 10%; and this increase is due only to the increased risk in the market. In other words, assume krf and stock's beta remains the same for this exercise. What will the new price be? Explain what happened.
7. Recalculate IBM's stock using the P/E ratio model (pp. 350-1) and the needed info found in the IBM pdf file. Explain why the present stock price is different from the price arrived at using CGM (Constant Growth Model).
Please show all work, including formulae and calculations used to arrive at financial values.
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