Question

1. If you are expecting dividend payments of $17.5 from your preferred stock, and if you...

1. If you are expecting dividend payments of $17.5 from your preferred stock, and if you require a 12% return from this investment, what is the fair value of your preferred stock?

a.

$19.60
b.

$15.63
c.

cannot be determined
d.

none

2. A company’s historical P/E ratio is 10. Its net income is $25 million and it has 500,000 shares of stock outstanding. The net profit is expected to grow by 3 percent annually. What is the expected price of this stock one year from now?

a.

$51.50
b.

$515
c.

cannot be determined
d.

none

ANSWER ALLLLLLLLLLLLLLLLLLLLL
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Homework Answers

Answer #1
1) d.None
Working:
Fair Value of preferred stock = Dividend /Required return on investment
= $ 17.5 / 12%
= $ 145.83
2)
b.$515
Working:
a.Expected net income one year from now = 25*(1+0.03)
= $          25.75 Million
b.Earning per share = Net Income /Number of shares
= $       2,57,50,000 /        5,00,000
= $ 51.50
c.Expected Price one year from now = Earning per share x P/E Ratio
= $ 51.50 x 10
= $ 515
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