Financial Instruments Paper 7

1

An analyst is in the process of determining what the current share price should be for PaperToy, Inc. In early January, the analyst collected the following information on PaperToy, Inc.
? Dividend at end of current year = $1.00
? Yearly dividend increase = 5%
? Expected investor return = 10%
Based on the data provided, the current share price for PaperToy, Inc., should be






2

A publicly traded corporation in an industry with an average price-earnings ratio of 20 has the following summary financial results.
Sales 1,000,000
Expenses 500,000
Operating income 500,000
Taxes 300,000
Net income 200,000
Assets 2,500,000
Liabilities 1,000,000
Shareholders’ equity 1,500,000
A competitor wishes to make a bid to acquire the stock of the company. What is the current market value?






3

How would a 5% stock dividend affect a company’s additional paid-in capital and retained earnings when declared?
Additional Paid-in Capital
Retained Earnings






4

A corporation paid a dividend of $3 per share last year. If investors expected the dividend per share to grow by 5% per year forever, what required return of investors is consistent with a current share price of $63 per share?






5

Wallace Corporation just paid a dividend of $2.00 per common share. Historical data indicate Wallace’s dividends grow at a steady rate of 5% per year. The required rate of return for investing in such stock is 18%. The current value of one share of Wallace’s common stock is






6

The CFO of ChemGen Ltd., a publicly traded chemical manufacturer, is in the process of evaluating the company’s dividend policy in relation to shareholder value. ChemGen’s dividend per share has been held constant at $2.30 for the last 10 years. The CFO would like to implement a 5% yearly dividend growth policy at ChemGen starting next year. The CFO has determined that the required return in the market for ChemGen stock is 13%. What is the forecasted value of ChemGen stock in 5 years if the CFO’s dividend growth policy is implemented?






7

A stock began the month with a stock price of $50 per share, paid a dividend of $2 per share during the month, and ended the month with a price of $52 per share. What total return did investors earn on the stock during this month?






8

A financial analyst is using the two-stage model of dividend growth to value a corporation that paid an annual dividend last year of $4 per share. The annual dividend is assumed to grow at 10% per year for the next 3 years and then grow at 5% per year thereafter. A 12% required return is assumed. Which change in one of the assumptions would cause the analyst to find a higher value for the stock?






9

Buying a wheat futures contract to protect against price fluctuation of wheat would be classified as a






10

An automobile company that uses the futures market to set the price of steel to protect a profit against price increases is an example of






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