22.  The Fridge-Air Company’s preferred stock pays a dividend of $4.50 per share annually.  If the required rate of return on comparable quality preferred stocks is 14%, calculate the value of Fridge-Aire’s preferred stock.

23.  The Joseph Company has a stock issue that pays a fixed dividend of $3.00 per share annually.  Investors believe the nominal risk-free rate is 4% and that this stock should have a risk premium of 6%.  What should be the value of this stock?

24.  The Lo Company earned $2.60 per share and paid a dividend of $1.30 per share in the year just ended.  Earnings and dividends per share are expected to grow at a rate of 5% per year in the future.  Determine the value of stock:

 a. if the required rate of return is 12%.

 b. if the required rate of return is 15%.

c. Given your answers to a & b, how are stock prices  affected by changes in investor’s required rate of return?

P2

In late 2010, you purchased the common stock of a company that has reported significant earnings increases in nearly every quarter since your purchase.  The price of the stock increased from $12 a share at the time of the purchase to a current level of $45.  Notwithstanding the success of the company, competitors are gaining much strength.  Further, your analysis indicates that the stock may be over-priced based on your projection of future earning growth.  Your analysis, however, was the same one year ago and the earnings have continued to increase.  Actions that you might take range from an outright sale of the stock (and the payment of capital gains tax) to doing nothing and continuing to hold the shares.  You reflect on these choices as well as other actions that could be taken.  Describe the various actions that you might take and their implications.

P6  

Find the real return on the following investments:

Stock  Nominal Return  Inflation

A   10%     3%

B   15%     8%

C   -5%     2%  

P8

The countries of Stabilato and Variato have the following average returns and standard deviations for thei stocks, bond, and short-term government securities.  What range of returns should you expect to earn 95% of the time for each asset class in you invested in Stabilato’s securities?  From investing in Variato’s securities?