Question

having the following information:- A $100.0 par value preferred stock with 10.0% dividend & a 15.0% required return. A $1.0 par value common stock with $3.0 EPS; a 5.0% risk-free rate; a 6.0% Market Risk-Premium; a 40.0% pay-out ratio; a 5.0% constant growth in EPS & dividend per share (g). A 20 years 6.0% coupon debenture (Non-guaranteed corporate bond) with a Yield-to-maturity (YTM) of 5.0%. Answer the following questions:-

1 - The preferred stock's price is ???

2 - The common stock's price is ???

3 - The required return on the market is ????

4 - The debenture's price is ????

5 - The debenture's discount / premium is???

Answer #1

1.

Return on preferred stock = Annual dividend / Share price

15% = ($100 * 10%) / Share price

15% = $10 / share price

Share price = $10 / 15% = $66.67

Preferred stock's price = $66.67

2.

Dividend per share = EPS * Payout ratio = $3 * 40% = $1.2

Cost of equity = Risk free rate + beta * market risk premium

Beta is not given in this question. Assume beta = 1

Cost of equity = 5% + 1 * 6% = 11%

Common stock's price = (D0 * (1+g)) / (Ke - g)

= ($1.2 * 1.05) / (0.11 - 0.05)

= $1.26 / 0.06

= $21

3.

Required return on the market = Market risk premium + risk free
rate = 6% + 5% = 11%

4.

FV = 1000

Nper = 20

Rate = 5%

PMT = 1000 * 6% = 60

Debenture's price is calculated by using the following excel
formula:

=PV(rate,nper,pmt,fv)

=PV(5%,20,-60,-1000)

= $1,124.62

Debenture's price = $1,124.62

5.

Premium = $1,124.62 - $1000 = $124.62

Market Info:- Real interest rate = 2.0%; Expected inflation =
4.0%; Rm = 12.0%; Tax = 30.0%.
Com. Stock info:- Par value = $1.0 ; Market value (price) = ?? ;
Beta = 1.60 ; No. of outstanding shares = 1,000,000.0 ; EPS $3.0 ;
pay-out ratio = 30.0%;
Growth in EPS & Dividends = 5.0% ;
Preferred Stock info:- Par value = $100.0; Dividend per share =
10.0%; Rp=8.0%; No. of outstanding shares = 100,000.0; Price =
????
Bonds...

Assume that you have the following information:- Market Info:-
Real interest rate = 2.0%; Expected inflation = 4.0%; Rm = 12.0%;
Tax = 30.0%. Com. Stock info:- Par value = $1.0 ; Market value
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1,000,000.0 ; EPS $3.0 ; pay-out ratio = 30.0%; Growth in EPS &
Dividends = 5.0% ; Preferred Stock info:- Par value = $100.0;
Dividend per share = 10.0%; Rp=8.0%; No. of outstanding...

Examine the following book-value balance sheet for University
Products Inc. The preferred stock currently sells for $30 per share
and pays a dividend of $3 a share. The common stock sells for $16
per share and has a beta of 0.6. There are 3 million common shares
outstanding. The market risk premium is 8%, the risk-free rate is
4%, and the firm’s tax rate is 40%.
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(Figures in $ millions)
Assets
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Cash and...

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Products Inc. The preferred stock currently sells for $15 per share
and pays a dividend of $3 a share. The common stock sells for $20
per share and has a beta of 0.6. There are 3 million common shares
outstanding. The market risk premium is 9%, the risk-free rate is
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BOOK-VALUE BALANCE SHEET
(Figures in $ millions)
Assets
Liabilities and Net Worth
Cash and...

Examine the following book-value balance sheet for University
Products Inc. The preferred stock currently sells for $15 per share
and pays a dividend of $3 a share. The common stock sells for $16
per share and has a beta of 0.9. There are 3 million common shares
outstanding. The market risk premium is 10%, the risk-free rate is
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BOOK-VALUE BALANCE SHEET (Figures in $ millions)
Assets - Liabilities and Net Worth
Cash...

Examine the following book-value balance sheet for University
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and pays a dividend of $3 a share. The common stock sells for $20
per share and has a beta of 0.7. There are 2 million common shares
outstanding. The market risk premium is 10%, the risk-free rate is
6%, and the firm’s tax rate is 40%. BOOK-VALUE BALANCE SHEET
(Figures in $ millions) Assets Liabilities and Net Worth Cash and...

Examine the following book-value balance sheet for University
Products Inc. The preferred stock currently sells for $30 per share
and pays a dividend of $3 a share. The common stock sells for $20
per share and has a beta of 0.7. There are 2 million common shares
outstanding. The market risk premium is 10%, the risk-free rate is
6%, and the firm’s tax rate is 40%.
BOOK-VALUE BALANCE SHEET
(Figures in $ millions)
Assets
Liabilities and Net Worth
Cash and...

Preferred stock has a par (face) value of $80. The annual
dividend is $6.00 per share. Investors in this preferred stock have
a required rate of return equal to 8%. Compute the current price of
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Round to the second decimal place

The following information pertains to Parsons Co.: Preferred
stock, cumulative: Par value per share $100 Dividend rate 8% Shares
outstanding 10,000 Dividends in arrears none Common stock: Par
value per share $10 Shares issued 115,000 Dividends paid per share
$2.20 Market price per share $49 Additional paid-in capital
$520,000 Unappropriated retained earnings (after closing) $250,000
Retained earnings appropriated for contingencies $280,000 Common
treasury stock: Number of shares 10,000 Total cost $260,000 Net
income

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