Chapter 7
Stock Valuation
Note: All problems in this chapter are available in MyFinanceLab. An asterisk (*) indicates problems with a higher level of difficulty. 1. 15,000 × $0.27 = $4050. 2. With cumulative voting, you are able to get proportional representation by putting all of your votes toward 2 directors, allowing you to elect representatives to 2 seats (20% of 10 seats) on the board. With non cumulative voting, you vote on each director individually and without a majority of the shares, you cannot ensure that your representative will win any of the elections (you could lose 80% to 20% in each of the 10 individual elections). 3. To make this easier, assume there are 100 shares of class A and 100 shares of class B. You then own 10 class A shares (10%) and 20 class B shares (20%). Because class B shares have 10 times the voting rights of class A, there are a total of 100 + 100(10) = 1100 votes. You have 10 + 20(10) = 210 of those votes, or 210/1100 = 0.191 (19.1%). 4. Plan: We can use Eq. 7.1 to solve for the price of the stock in one year given the current price of $50.00, the $2 dividend, and the 15% cost of capital. Execute: 50 =
2+ X 1.15 X = 55.50

Evaluate: At a current price of $50, we can expect Evco stock to sell for $55.50 immediately after the firm pays the dividend in 1 year. 5. Plan: We can rearrange Eq. 7.1 to find the cost of capital given the current stock price of $20, the $1 expected dividend, and the expected stock price right after paying the dividend of $22. We can use Eq. 7.2 to calculate the dividend yield and the capital gain. Execute: rE = Div1 + P1 −1 P0 P − P0 Div1 + 1 = P0 P0  
Capital Gain Rate

Dividend Yield

rE =

1 22 − 20 + 20 20 = 0.15 = 15%

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Berk/DeMarzo/Harford • Fundamentals of Corporate Finance, Second Edition

Dividend Yield: 5% (1/20)