1 When a firm invests in a risky project that happens to be highly profitable, bondholders also

enjoy a higher payoff than what a less risky project would produce the same way as
stockholders would. (True or False? Why?)

2 (One-period pricing.) Recall that since stocks have really long lives, in the class we first imagined owning a stock for
powerful scenario, today's stock price is the PV of next year's dividend and next year's stock price.) The stock of Aly
trading at $30 per share, after just having paid a $2.60 per share dividend. The market expects a dividend of $3.30
today. If the equity cost of capital (same as discount rate for equity) is 13% for this firm, the expected ex-dividend
paid next year) in one year (t = 1) should be closest to: a. $33.90 b. $30.60 c. $32.77
d. $31.30

$ 30.00 p0 $ 30.60 (price*(1+rate)) - div1

2.6 div0
3.3 div1
13.00% r

3 Julia's Jewel Company (JJC) currently has a stock price of $53 per share. If JJC's cost of equity capital (same as disco
dividend yield (DIV1/P0) is 3.50%, the expected price per share of the company in one year (t = 1) is closest to?
a. $54.85 b. $56.82 c. $55.91 d. $57.77

$ 53.00 p0 1.855 Div1

9.00% r $ 55.92 (price*(1+rate)) - div1
3.50% Div1/P0

4 Locked-In Real Estate (LIRE) is preparing for their Initial Public Equity Offering (IPO). With its holdings consisting of
for expanding, LIRE plans to payout all of its earnings as dividends. These dividends amount to $3.25 per share, for
what is the stock price of LIRE? (Round off decimals to the closest integer, i.e., rounding $30.49 down to $30 and ro

$ 3.25 Div1
8.00% r

$ 41 price

5 You are deciding whether to add Bard Publishing to your portfolio, but you are concerned about your projection fo
capital (the discount rate for equity) is known to be 8% and they just paid a dividend of $3.50 per share. When calc
cannot decide if the constant growth rate will be 4.5% or 5.5%. By how much does this seemingly small difference
share? (Round off decimals to the closest integer, i.e., rounding $30.49 down to $30 and rounding $30.50 up to $3
 8.00% rate
3.5 Div0
Div1 Price
4.50% growth A $ 3.66 $ 104.50
5.50% growth B $ 3.69 $ 147.70
$ 43

6 Dixie Construction is a young firm that is in the process of bidding (and winning) construction contracts. While they
once the contracts are awarded and their work begins in earnest, they expect to be able to start paying a dividend
from now (t = 3). From that point forward, as they build their reputation and capacity, they expect to be able to inc
Dixie's cost of equity capital is 8.00% (the discount rate for equity), what price per share should their shares trade a
closest integer, i.e., rounding $30.49 down to $30 and rounding $30.50 up to $31.)

$ 3.00 Div3
3 years $ 133.33 - value of stock for year 3, that will traded at period 2
5.75% growth $ 114 - present value of the value
8.00% rate
 0 Bondholders hold a contract, that specifies exact amount of money they
will receive independent of the any profit situation of the company.

gined owning a stock for only one period. In this simple, yet
k price.) The stock of Alydar Oil, an all-equity firm, is currently
ects a dividend of $3.30 per share to be paid one year from
e expected ex-dividend price (the stock price after the dividend is

ty capital (same as discount rate for equity) is 9% and the current

(t = 1) is closest to?

s holdings consisting of rent controlled apartments, and no plans

t to $3.25 per share, forever. If the expected rate of return is 8%,
0.49 down to $30 and rounding $30.50 up to $31.)

about your projection for their growth rate. Bard's cost of equity
50 per share. When calculating the value of the stock today, you
mingly small difference impact your valuation, i.e., the price per
ounding $30.50 up to $31.)
on contracts. While they are unable to pay any dividends today,
start paying a dividend of $3.00 per share beginning three years
expect to be able to increase their dividend 5.75% each year. If
ould their shares trade at today? (Round off decimals to the

aded at period 2