3.Is minimizing WACC by having a largely debt-based capital structure
a high-risk strategy, given the threat of bankruptcy in an
overleveraged business? Explain your answer.
4.What are the extraneous factors which impact the ability of a
business to radically alter its debt-equity mix?
5.Preferred Stock. Preferred Products has issued preferred stock with
an $8 annual dividend that will be paid in perpetuity.
a. If the discount rate is 12 percent, at what price should the preferred sell?
b. At what price should the stock sell 1 year from now?
c. What is the dividend yield, the capital gains yield, and the
expected rate of return of the stock?
6. Stock Values. Integrated Potato Chips paid a $1 per share dividend
yesterday. You expect the dividend to grow steadily at a rate of 4
percent per year.
a. What is the expected dividend in each of the next 3 years?
b. If the discount rate for the stock is 12 percent, at what price
will the stock sell?
c. What is the expected stock price 3 years from now?
d. If you buy the stock and plan to hold it for 3 years, what payments
will you receive? What is the present value of those payments? Compare
your answer to (b).
7. Constant-Growth Model. Here are data on two stocks, both of which
have discount rates of 15 percent:
                   Stock A    Stock B
Return on equity     15%        10%
Earnings per share  $2.00      $1.50
Dividends per share $1.00      $1.00
a. What are the dividend payout ratios for each ?rm?
b. What are the expected dividend growth rates for each ?rm?
c. What is the proper stock price for each ?rm?

8. Dividend Policy. Here are several assertions about typical
corporate dividend policies. Which of them are true? Write out a
corrected version of any false statements.
a. Most companies set a target dividend payout ratio.
b. They set each year?s dividend equal to the target payout ratio
times that year?s earnings.
c. Managers and investors seem more concerned with dividend changes
than dividend levels.
d. Managers often increase dividends temporarily when earnings are
unexpectedly high for a year or two.

9.Dividend Policy. For each of the following four groups of companies,
state whether you would expect them to distribute a relatively high or
low proportion of current earnings and whether you would expect them
to have a relatively high or low price-earnings ratio.
a. High-risk companies.
b. Companies that have recently experienced a temporary decline in pro?ts.
c. Companies that expect to experience a decline in pro?ts.
d. ?Growth? companies with valuable future investment opportunities.

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Clarification of Question by rcruz-ga on 26 Mar 2005 12:57 PST

Disregard 3 and 4 questions.

5.Preferred Stock. Preferred Products has issued preferred stock with
an $8 annual dividend that will be paid in perpetuity.
a. If the discount rate is 12 percent, at what price should the preferred sell?
b. At what price should the stock sell 1 year from now?
c. What is the dividend yield, the capital gains yield, and the
expected rate of return of the stock?
6. Stock Values. Integrated Potato Chips paid a $1 per share dividend
yesterday. You expect the dividend to grow steadily at a rate of 4
percent per year.
a. What is the expected dividend in each of the next 3 years?
b. If the discount rate for the stock is 12 percent, at what price
will the stock sell?
c. What is the expected stock price 3 years from now?
d. If you buy the stock and plan to hold it for 3 years, what payments
will you receive? What is the present value of those payments? Compare
your answer to (b).
7. Constant-Growth Model. Here are data on two stocks, both of which
have discount rates of 15 percent:
                   Stock A    Stock B
Return on equity     15%        10%
Earnings per share  $2.00      $1.50
Dividends per share $1.00      $1.00
a. What are the dividend payout ratios for each ?rm?
b. What are the expected dividend growth rates for each ?rm?
c. What is the proper stock price for each ?rm?

8. Dividend Policy. Here are several assertions about typical
corporate dividend policies. Which of them are true? Write out a
corrected version of any false statements.
a. Most companies set a target dividend payout ratio.
b. They set each year?s dividend equal to the target payout ratio
times that year?s earnings.
c. Managers and investors seem more concerned with dividend changes
than dividend levels.
d. Managers often increase dividends temporarily when earnings are
unexpectedly high for a year or two.

9.Dividend Policy. For each of the following four groups of companies,
state whether you would expect them to distribute a relatively high or
low proportion of current earnings and whether you would expect them
to have a relatively high or low price-earnings ratio.
a. High-risk companies.
b. Companies that have recently experienced a temporary decline in pro?ts.
c. Companies that expect to experience a decline in pro?ts.
d. ?Growth? companies with valuable future investment opportunities.