P7–2 Preferred dividends Slater Lamp Manufacturing has an outstanding issue of preferred stock with an $80 par value and an 11% annual dividend. a. What is the annual dollar dividend? If it is paid quarterly, how much will be paid each quarter?

P7–2 Preferred dividends Slater Lamp Manufacturing has an outstanding issue of preferred

stock with an $80 par value and an 11% annual dividend.

a. What is the annual dollar dividend? If it is paid quarterly, how much will be paid

each quarter?

b. If the preferred stock is noncumulative and the board of directors has passed the

preferred dividend for the last three quarters, how much must be paid to preferred

stockholders in the current quarter before dividends are paid to common

stockholders?

c. If the preferred stock is cumulative and the board of directors has passed the preferred

dividend for the last three quarters, how much must be paid to preferred

stockholders in the current quarter before dividends are paid to common stockholders?

P7–8 Common stock value: Constant growth Use the constant-growth model (Gordon

growth model) to find the value of each firm shown in the following table.

Firm Dividend expected next year Dividend growth rate Required return

A $1.20 8% 13%

B 4.00 5 15

C 0.65 10 14

D 6.00 8 9

E 2.25 8 20

P7–10 Common stock value: Constant growth The common stock of Denis and Denis

Research, Inc., trades for $60 per share. Investors expect the company to pay a

$3.90 dividend next year, and they expect that dividend to grow at a constant rate

forever. If investors require a 10% return on this stock, what is the dividend growth

rate that they are anticipating?

P7–14 Common stock value: Variable growth Lawrence Industries’ most recent annual

dividend was $1.80 per share (D0 = $1.80), and the firm’s required return is 11%.

Find the market value of Lawrence’s shares when:

a. Dividends are expected to grow at 8% annually for 3 years, followed by a 5%

constant annual growth rate in years 4 to infinity.

b. Dividends are expected to grow at 8% annually for 3 years, followed by a 0%

constant annual growth rate in years 4 to infinity.

c. Dividends are expected to grow at 8% annually for 3 years, followed by a 10%

constant annual growth rate in years 4 to infinity.

P7–17 Using the free cash flow valuation model to price an IPO Assume that you have an

opportunity to buy the stock of CoolTech, Inc., an IPO being offered for $12.50 per

share. Although you are very much interested in owning the company, you are concerned

about whether it is fairly priced. To determine the value of the shares, you

have decided to apply the free cash flow valuation model to the firm’s financial data

that you’ve developed from a variety of data sources. The key values you have compiled

are summarized in the following table.

Free cash flow

Year (t) FCFt

2016 $ 700,000

2017 800,000

2018 950,000

2019 1,100,000

Other data

Growth rate of FCF, beyond 2019 to infinity = 2%

Weighted average cost of capital = 8%

Market value of all debt = $2,700,000

Market value of preferred stock = $1,000,000

Number of shares of common stock outstanding = 1,100,000

a. Use the free cash flow valuation model to estimate CoolTech’s common stock

value per share.

b. Judging on the basis of your finding in part a and the stock’s offering price,

should you buy the stock?

c. On further analysis, you find that the growth rate in FCF beyond 2019 will be

3% rather than 2%. What effect would this finding have on your responses in

parts a and b?

P7–19 Valuation with price/earnings multiples For each of the firms shown in the following

table, use the data given to estimate its common stock value employing price/

earnings (P/E) multiples.

Firm Expected EPS Price/earnings multiple

A $3.00 6.2

B 4.50 10.0

C 1.80 12.6

D 2.40 8.9

E 5.10 15.0