1. We will now consider the same information again.A firm’s total annual dividend payout is $1 million.Its stock price is $45 per share and it has 17,500,000 shares outstanding.The firm earned $4 million in Net Income last year.This year, the firm expects earnings to grow at 7%, with growth the year after that expected to be 5%, and then in all following years, the firm expects earnings to grow at 3%.The firm plans to hold their dividend payout ratio constant over the coming 20 years and beyond.The risk free rate is 3%, beta for the dividend portion of the firm must be lower than for the entire income stream, and it measured at is 0.65, and the equity risk premium is 7.75%. What is the value of equity for the entire firm using the DIVIDEND DISCOUNT model, using annual dividends as free cash flow?
2. Rather than changing the beta for the dividend versus the entire income stream, could the terminal value be changed to make up for the difference in equity valuations above (#4 versus #5)? YES or NO
3. A 10-year bond pays semiannual payments, and has par value of $1,000.The total annual coupon is $70.If the market rate of interest for this bond moves to 5% exactly one year after issue, what would the market price be for the bond?
4. A 10-year bond pays semiannual payments, and has par value of $1,000.The total annual coupon is $70.If the market rate of interest for this bond moves to 3% exactly one year after issue, what would the market price be for the bond?
5. Inside Traders opens a brokerage account and purchases 500 shares of Energy Infusion at $70 per share.They borrow $20,000 to pay for the stock.The interest rate on the loan is 7%.If the maintenance margin requirement is 25%, how low can the stock price go in one year before a margin call would be made?
6. Inside Traders opens a brokerage account and purchases 1,500 shares of Energy Innovations at $370 per share.They borrow $300,000 to pay for the stock.The interest rate on the loan is 9%.If the maintenance margin requirement is 25%, how low can the stock price go in one year before a margin call would be made?
7. Great Bear Traders are bearish on the Energy Innovations stock.They short sell 10,000 shares at the $370 per share price.The stock will pay a $5 dividend this year.The initial margin requirement is 60%, while the maintenance margin on short sales is 35%.If the stock rallies, how high can it go in one year before a margin call is made?