Finance Problems: Stock Price, Dividends, Capital Structure and Portfolio Management

Calculating Stock Price with Given Growth Rate and Required Rate of Return

1.Assume the common stock has just paid a dividend of $2.00. If the expected long-run growth rate for this stock is 6.0%, and if investors’ required rate of return is 12%, what is the stock price?
2.Assume the common stock has a current stock price, P0 = $20. If the last dividend paid was $1.00, and the growth rate of the stock (which is constant) = 6%, what is the stock’s expected total return for the coming year?
3.Antivirus Inc. has 10,000 cumulative preferred shares that is entitled to dividends of $2.00 per share and 5,000 common shares. Last year due to poor earnings the Board of Directors did not declare any dividends. This year, due to higher earnings the Board of Directors has declared dividends of $100,000. How would the dividends be allocated between the preferred shareholders and the common shareholders?
4.Antivirus Inc. expects to have a capital budget of $200,000 next year. The company wants to maintain a target capital structure with 60% debt and 40% equity, and its forecasted net income is $500,000. If the company follows the residual dividend policy, how much in dividends, if any, will it pay?
5.Assume it is several years later and the company has done extremely well. Its stock sells for $200 per share and Management wants to get the price down to a more typical level, which it thinks is $40 per share. What stock split would be required to get to this price?
6.Suppose the Treasury Bill risk-free rate = 9%, Stock Market return =14%, and Antivirus Inc.’s stock beta = 1.3
a.What is the required return on Maxwell stock?
b.If the expected inflation rate (Inflation Premium) increased by 1%, what is the effect on the Treasury Bill risk-free rate, Stock Market return, and required return on Maxwell stock
c.Assume that the current trade war increases Market Risk Premium by 1%, what is the effect on the required return on Antivirus stock
7.Textbook Problems from 3rd Edition you should do are Chapters7,8, 13:
8.Ch 7-1, 2, 3, 5,6, 9, 10
9.Ch 8-2,3, 5, 8
10.Ch 13-1,2,4,5,9,10
11.Ch 17-2,3,6,8,9; Ch 18-1,2,4,5 for accounting types
12.You are a portfolio manager of a $4 million fund consisting of the following stocks:
                    Invested Amount    Beta        Expected Return
    Bee-Bio-Tech Ltd.        $ 750,000        1.90            12.5%
    Iowe Bank Ltd.            1,250,000        0.75             6.75%
    Electric Auto Ltd.        2,000,000        1.20             9.00%
    
    Assure the risk-free rate is 3% and the market return is 8%
a.What return should you expect from the portfolio, based on the individual stock’s expected return?
b.What return should you require from the portfolio, based on the individual stock’s beta?
You are considering another stock, Pacific Petroleum, which has a stock beta of 2.3. If Pacific Petroleum has an expected return of 14%, should you buy this stock? Why or why not?