1-3) Why does a company decide to spin off a subsidiary?

4-8) When does a company usually declare a stock spilt? What effect does a stock split have on the
market price? How does a stock split affect the market value of the investor’s investment ?

9-13) What are the reasons why a company will buy back its shares? What are the purposes of having
Treasury stock? What is the short-term effect of buying back shares on the stock price?

14) How do you compute market capitalization?

15-17) Explain he terms bid, ask and bid-ask spread.

18-20) How are stock dividends similar to stock split? When are they taxed?

21) Who receives the divided if a stock is sold on an ex-dividend date?

22-24) What are the advantages and disadvantages of dividend reinvestment plans?

For numbers 25 to 30: Consider the following information about Truly Good Coffee, Inc.

Total assets $240 million

Total debt $115 million
Preferred stock $ 25 million
Common stockholders’ equity $100 million
Net profits after taxes $22.5 million
Number of preferred stock outstanding 1 million shares
Number of common stock outstanding 10 million shares
Preferred dividends paid $2 per share
Common dividends paid $0.75 per share
Market price of the preferred stock $30.75 per share
Market price of the common stock $25.00 per share

Use the information above to find the following.

25. The company’s book value
26. Its book value per share
27. The stock’s earnings per share (EPS)
28. The dividend payout ratio
29. The dividend yield on the common stock
30. The dividend yield on the preferred stock

For numbers 31 to 40:

Assume you’ve generated the following information about the stock of Bufford’s Burger
Barns: The company’s latest dividends of $4 a share are expected to grow to $4.32 next year,
to $4.67 the year after that, and to $5.04 in three years. After that, you think dividends will
grow at a constant 6% rate.

a) (31-32) Use the variable growth version of the dividend valuation model and a required
return of 15% to find the value of the stock.
b) (33-34) Suppose you plan to hold the stock for three years, selling it immediately after receiving
the $5.04 dividend. What is the stock’s expected selling price at that time? As in part (a), assume
a required return of 15%.
c) (35-36) Imagine that you buy the stock today paying a price equal to the value that you
calculated in part (a). You hold the stock for three years, receiving the dividends as described
above. Immediately after receiving the third dividend, you sell the stock at the price calculated
in part b. Use the IRR approach to calculate the expected return on the stock over three years.
Could you have guessed what the answer would be before doing the calculation?
d) (37-38) Suppose the stock’s current market price is actually $44.65. Based on your analysis from
part a, is the stock overvalued or undervalued?
e) (39-40) A friend of yours agrees with your projections of Bufford’s future dividends, but he
believes that in three years, just after the company pays the $5.04 dividend, the stock will be
selling in the market for $53.42. Given that belief, along with the stock’s current market price
from part d, calculate the return that your friend expects to earn on this stock over the next
three years.