# financial calculator or excel.

June 12, 2016

Question
FINC 5000

Homework Assignment for Week 4:
Chapter 7:
For Week 4, please turn in the answers to the following questions:
2. (common stock valuation, constant growth) Youve discovered a company that is expected
to pay \$2.25 dividend at the end of this year. The dividend is expected to grow forever at
a constant rate of 4% a year. The required rate of return for this stock is 8%. Given these
conditions, what is the estimated market value per share of this stock?
3. (common stock valuation, non-constant growth) Youve discovered a company that is
expected to pay \$2.25 dividend at the end of this year. You estimate the companys
dividends will grow 10% next year and then at a constant rate of 4% thereafter. The
required rate of return for this stock is 8%. Given these conditions, what is the estimated
market value per share of this stock?
4. (Issues with the dividend growth model) What are three issues that must be dealt with
when evaluating stocks with the dividend growth model?
5. (The PE model) Imagine you are estimating the market value of Wild West Oil
Companys stock, which is not publicly traded. So you decide to use the PE model for
your valuation. You observe the following PE Ratio comparisons for your project:
Company
a.
b.
c.

Exxon-Mobil
Chevron
ConocoPhillips

PE Ratio (from the Internet)
10
11
14

a. What is the implied appropriate PE for Wild West Oil Company?
b. Assuming Wild West Oil Companys EPS is = \$3.10, what is your estimate for the
market value of the companys stock?
6. (Preferred stock valuation) You have discovered a company which has issued preferred
stock with a stated annual dividend of 6% of its par value of \$100. The average yield on
preferred stock of this type among other companies is 7%. Given these conditions, what
is your estimate of the market value of this companys preferred stock?