Iowa State University

HDFS 283

1)Assume that you own 200 shares of General Dynamics Corp. (GD) selling at $90 per share. In order to make the stock more affordable for the average investor GD’s management had decided to split the stock.

1. 1. How much was your investment worth prior to the split?
   2. Assuming GD’s management decides to split the stock three-for-one, how many shares would you own after the split?
   3. What is the new price per share immediately after the split?

1. 4. How much would your investment be worth are the three-for-one split?

2. The Haley Corporation has just announced year-end results as followed: Value of company assets: $12,500,000

Value of company liabilities: $6,500,000 Net incomes: $1,600,000

Common stock dividends: $250,000 Preferred stock dividends: $400,000

Number of shares of common stock outstanding: 100,000

closing price of Haley Corporation’s stock: $45.00 per share

2. 1. Calculate the book value per share
   2. Calculate earnings per share
   3. Calculate Haley Corporation’s dividend yield
   4. Calculate the market-to-book ratio
3. The Smell Fresh Kitty Litter Company has assists of $10 million, liabilities of $4 million and 2 million shares outstanding. Assuming creditors are paid in full prior to stockholders receiving any money, what is the maximum amount the stockholder would receive in a bankruptcy settlement? What is the amount per share they would receive?

4. You’ve just learned that Graham Records has purchased the lifetime distribution rights to the music of a new band called the French Fries. Based on this good news you’ve estimated that Graham Records should pay $4 in dividends next year. You also think that the dividends paid out should increase by 5% a year indefinitely. As a knowledgeable investor, you’ve determined your required rate of return is 9%.
   1. What is your estimate of the value of Graham Records common stock?
   2. What would the value of the stock be if you did not anticipate any increase in the dividend over time?
   3. If the required rate of return increases to 12%, what would happen to the stock price?
5. An investor is considering purchasing one of the following three stocks. Stock X has a market capitalization of $7 billion, pays a relatively high dividend and with little increase in earnings, and has a P/E ratio of 11. Stock Y has a P/E ratio of 39. Stock Z, a housing industry company, has a market capitalization of $800 million and a P/E ratio of 18.
   1. Classify these stocks according to their market capitalization
   2. Which of these would you classify as a growth stock? Why?
   3. Which stock would be most appropriate for an aggressive investor?
   4. Which stock would be most appropriate for someone seeking a combination of safety and earnings?
6. Use the following data to answer the questions that follow:

1. 1. If the S&P 500 goes up by 15%, how much should the stocks of Savoy, Hokie, Graham, and Expo change in value?
   2. If the stock market drops by 10%, which one of these stocks should outperform the others? Why?