Question

Logistic company just paid a $2 a year dividend which is expected to increase by 5 percent per year. If you are planning on buying 1,000 shares of this stock, how much should you expect to pay per share if the required rate of return for this type of security is 9 percent at the time of your purchase?

Select one:

a. $48.60

b. $50.00

c. $57.89

d. None of these

e. $52.50

Maritime Builder is considering issuing preferred stock. The preferred stock would have a par value of $72 and a 4.30 percent of par value as dividend. What is the cost of preferred stock for Maritime if flotation costs to issue this stock would be 3.5 percent of the stock price?

Select one:

a. 4.8 percent

b. 5.2 percent

c. None of these

d. 6.0 percent

e. 4.4 percent

show me how you got it

Answer 1

Calculation of the Share price of Logistic company :-

Share price = D0 ( 1+g) / (r -g)

D0 = Latest dividend paid

g= Growth rate in dividend

r = required rate of return

Share price = 2(1.05) / (0.09 - 0.05)

= 2.1 / 0.04

Share price = $ 52.5 Per share

Cost of preferred stock of maritime builder :-

Cost of preffered stock = Dividend / Net proceeds

Dividend = 72 * 4.3% = $ 3.096

Net proceeds = Issue price - Flotation cost = 72 - 72 * 3.5% =$ 69.48

Cost of preferred stock = 3.096 / 69.48 = 4.46%