Question

1. The preferred stock of Gandt Corporation pays a $ 1.75 dividend. What is the value of the stock if your required return is 12 percent? The value of the preferred stock is-----per share.  ​(Round to the nearest​ cent.)

2. ​(Preferred stock valuation​) What is the value of a preferred stock when the dividend rate is 12 percent on a $ 100 par​ value? The appropriate discount rate for a stock of this risk level is 15 percent.The value of the preferred stock is ​$

3. Mosser Corporation common stock paid $ 1.69 in dividends last year and is expected to grow indefinitely at an annual 6 percent rate. What is the value of the stock if you require a return of 14 ​percent? The value of the Mosser Corporation common stock is

​4. f you purchased 100 shares of common stock that pays an​ end-of-year dividend of ​$2.75what is your expected rate of return if you purchased the stock for ​$34.29per​ share? Assume the stock is expected to have a constant growth rate of 7 percent.

Answer 1

Answer to Question 1:

Value of Preferred Stock = Annual Dividend / Required Return
Value of Preferred Stock = $1.75 / 0.12
Value of Preferred Stock = $14.58

Answer to Question 2:

Annual Dividend = Dividend Rate * Par Value
Annual Dividend = 12% * $100
Annual Dividend = $12.00

Value of Preferred Stock = Annual Dividend / Required Return
Value of Preferred Stock = $12.00 / 0.15
Value of Preferred Stock = $80.00

Answer to Question 3:

Expected Dividend = Last Dividend * (1 + Growth Rate)
Expected Dividend = $1.69 * 1.06
Expected Dividend = $1.7914

Value of Common Stock = Expected Dividend / (Required Return - Growth Rate)
Value of Common Stock = $1.7914 / (0.14 - 0.06)
Value of Common Stock = $22.39

Answer to Question 4:

Required Return = Expected Dividend / Current Price + Growth Rate
Required Return = $2.75 / $34.29 + 0.07
Required Return = 0.1502 or 15.02%