Business Finance Homework Help

I’m studying for my Management class and need an explanation.

Chapter 7 Questions & Problems: 14, 15, 16

14. Constant-Growth Model. Arts and Crafts Inc. will pay a dividend of $5 per share in 1 year. It

sells at $50 a share, and firms in the same industry provide an expected rate of return of 14%.

What must be the expected growth rate of the company’s dividends? (LO7-2)

15. Constant-Growth Model. A stock sells for $40. The next dividend will be $4 per share. If the

rate of return earned on reinvested funds is a constant 15% and the company reinvests a constant

40% of earnings in the firm, what must be the discount rate? (LO7-2)

16. Constant-Growth Model. Gentleman Gym just paid its annual dividend of $3 per share, and it

is widely expected that the dividend will increase by 5% per year indefinitely. (LO7-2)

a. What price should the stock sell at? The discount rate is 15%.

b. How would your answer change if the discount rate was only 12%? Why does the answer

change?

Chapter 11 Questions & Problems: 1, 2, 3, 4, 5 1. Stock Market History. Use the data in Tables 11.1 and 11.4 to answer these questions: (LO11-1)

a. What was the average rate of return on large U.S. common stocks from 1900 to 2017?

b. What was the average risk premium on large stocks?

c. What was the standard deviation of returns on the market portfolio?

2. Maturity Premiums. Investments in long-term government bonds produced a negative average

return during the period 1977–1981. How should we interpret this? Did bond investors in 1977

expect to earn a negative maturity premium? What do these 5 years of bond returns tell us about

the normal future maturity premium? (LO11-1)

3. Risk Premiums. What will happen to the opportunity cost of capital if investors suddenly

become especially conservative and less willing to bear investment risk? (LO11-1)

4. Risk Premium. If the stock market return next year turns out to be −20%, will our estimate of

the “normal” risk premium increase or decrease? Does this make sense? (LO11-1)

5. Risk Premiums and Discount Rates. Top hedge fund manager Sally Buffit believes that a

stock with the same market risk as the S&P 500 will sell at year-end at a price of $50. The stock

will pay a dividend at year-end of $2. What price should she be willing to pay for the stock

today? Assume that risk-free Treasury securities currently offer an interest rate of 2%. Use

Table 11.1 to find a reasonable discount rate. (LO11-1)