# Chapter 7 Solution Managerial Finance

Topics: Stock market, Stock, Preferred stock Pages: 16 (2976 words) Published: November 18, 2010
Chapter 7 Stock Valuation
Solution to Problems
P7-1. LG 2: Authorized and Available Shares
Basic
(a) Maximum shares available for sale
Authorized shares 2,000,000
Less: Shares outstanding 1,400,000
Available shares 600,000
(b) \$48,000,000Total shares needed 800,000 shares\$60==
The firm requires an additional 200,000 authorized shares to raise the necessary funds at \$60 per share. (c) Aspin must amend its corporate charter to authorize the issuance of additional shares. P7-2. LG 2: Preferred Dividends

Intermediate
(a) \$8.80 per year or \$2.20 per quarter
(b) \$2.20 For a noncumulative preferred only the latest dividend has to be paid before dividends can be paid on common stock. (c) \$8.80 For cumulative preferred all dividends in arrears must be paid before dividends can be paid on common stock. In this case the board must pay the 3 dividends missed plus the current dividend. P7-3. LG 2: Preferred Dividends

Intermediate
A \$15.002 quarters in arrears plus the latest quarter
B \$8.80 only the latest quarter
C \$11.00 only the latest quarter
D \$25.504 quarters in arrears plus the latest quarter
E \$8.10 only the latest quarter
Chapter 7 Stock Valuation 171
P7-4. LG 2: Convertible Preferred Stock
Challenge
(a) Conversion value = conversion ratio × stock price = 5 × \$20 = \$100 (b) Based on comparison of the preferred stock price versus the conversion value the investor should convert. If converted, the investor has \$100 of value versus only \$96 if she keeps ownership of the preferred stock. (c) If the investor converts to common stock she will begin receiving \$1.00 per share per year of dividends. Conversion will generate \$5.00 per year of total dividends. If the investor keeps the preferred they will receive \$10.00 per year of dividends. This additional \$5.00 per year in dividends may cause the investor to keep the preferred until forced to convert through use of the call feature. P7-5. LG 2: Stock Quotation

Basic
(a) Wednesday, December 13
(b) \$81.75
(c) +3.2%
(d) P/E ratio = 23
The P/E is calculated by dividing the closing market price by the firm’s most recent annual earnings per share. The P/E is believed to reflect investor expectations concerning the firm’s future prospects. Higher (lower) P/E ratios reflect investor optimism (pessimism) and confidence (concern). (e) \$81.75

(f) \$1.32
(g) Highest price = \$84.13; Lowest price = \$51.25
(h) 12,432 round lots for total shares of 12,432 × 100 = 1,243,200 shares. (i) The price increased by \$1.63. This increase tells us that the previous close was \$80.12. P7-6. LG 4: Common Stock Valuation–Zero Growth: Po = D1 ÷ ks Basic

(a) Po = \$2.40 ÷ 0.12
Po = \$20
(b) Po = \$2.40 ÷ 0.20
Po = \$12
(c) As perceived risk increases, the required rate of return also increases, causing the stock price to fall. P7-7. LG 4: Common Stock Valuation–Zero Growth
Intermediate \$5.00Value of stock when purchased \$31.250.16\$5.00Value of stock when sold \$41.670.12Sally’s capital gain is \$10.42 (\$41.67\$31.25).====− 172 Part 2 Important Financial Concepts
P7-8. LG 4: Preferred Stock Valuation: PSo = Dp ÷ kp
Intermediate
(a) PS0 = \$6.40 ÷ 0.093
PS0 = \$68.82
(b) PS0 = \$6.40 ÷ 0.105
PS0 = \$60.95
The investor would lose \$7.87 per share (\$68.82 − \$60.95) because, as the required rate of return on preferred stock issues increases above the 9.3% return she receives, the value of her stock declines. P7-9. LG 4: Common Stock Value–Constant Growth: Po = D1 ÷ (ks − g) Basic

Firm
Po = D1 ÷ (ks − g)
Share Price
A
Po = \$1.20 ÷ (0.13 − 0.08)
=
\$24.00
B
Po = \$4.00 ÷ (0.15 − 0.05)
=
\$40.00
C
Po = \$0.65 ÷ (0.14 − 0.10)
=
\$16.25
D
Po = \$6.00 ÷ (0.09 − 0.08)
=
\$600.00
E
Po = \$2.25 ÷ (0.20 − 0.08)
=
\$18.75
P7-10. LG 4: Common Stock Value–Constant Growth
Intermediate
(a) 1s0ssDkgP\$1.20(1.05)k0.05\$28\$1.26k0.050.0450.050.0959.5%\$28=+×=+=+=+== (b) ss\$1.20(1.10)k0.10\$28\$1.32k0.100.0470.100.14714.7%\$28×=+=+=+== P7-11. LG 4: Common Stock Value–Constant Growth: Po = D1 ÷ (ks −...