Question

1. What is the price of a share of preferred stock that has a dividend of $3 if the cost of preferred (rp) is 15%

2. What would you pay for a share of common stock if you expect the next dividend to be $3 and you expect to sell it in one year for $25, assuming the cost of equity (re) is 15%.

3. MBV is a cruise line which announced that dividends are expected to grow by 3.5 percent annually, having paid a recent dividend of $1.20 per share last month. If you require a 15 percent rate of return, how much are you willing to pay to purchase one share of this stock today?

4. What would you pay for a share of common stock of Pizza Hut where the last dividend was $17 and dividend is expected to increase by 1.6 percent annually, assuming a cost of equity of 15 percent?

5. Total Construction sells a share of common stock for $28.16. Annual dividends next year is expected to be $1.35 and has over the years been increasing its dividends by 3% annually. What is the expected rate of return on the company’s stock if it expects to continue the same growth pattern in the coming years?

6. Grenlec’s preferred stock is selling for $25 in the market and pays $2.5 in dividends. What is the expected rate of return on the stock? If your required rate of return is 12 percent, what is the fair value of the stock for you? Should you acquire the stock?

Answer 1

1)

Price of preferred stock	Annual dividend÷Required rate
Here,
Annual dividend	$                                                    3.00
Required rate	15.00%
Price of preferred stock	$                           20.00
	3÷15%