Problem#7

Question 1
Quest Financial services balance sheets report \$200 million in total debt, \$100 million in short-term investments, and \$30 million in preferred stock. Quest has 10 million shares of common stock outstanding. A financial analyst estimated that Quest’s value of operations is \$1000 million. What is the analyst’s estimate of the intrinsic stock price per share?
Question 2
Lincoln Incorporated is expected to pay a \$4.5 per share dividend at the end of this year (i.e., D1 = \$4.50). The dividend is expected to grow at a constant rate of 5% a year. The required rate of return on the stock is, rs, is 12%. What is the estimated value per share of Boehm stock?
Question 3
Assume that the average firm in Masters Corporation’s industry is expected to grow at a constant rate of 3% and that its dividend yield is 5%. Masters is about as risky as the average firm in the industry and just paid a dividend (D0) of \$2.5. Analysts expect that the growth rate of dividends will be 25% during the first year (g0,1 = 25%) and 10% during the second year (g1,2 = 10%). After Year 2, dividend growth will be constant at 5%. What is the required rate of return on Masters’s stock? What is the estimated intrinsic per share?
Question 4
Several years ago, Macro Riders issued preferred stock with a stated annual dividend of 5% of its \$600 par value. Preferred stock of this type currently yields 10%. Assume dividends are paid annually.
i)What is the estimated value of Macro’s preferred stock?
ii)Suppose interest rate levels have risen to the point where the preferred stock now yields 14%. What would be the new estimated value of Macro’s preferred stock?

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