Question

10. Aunt Kathleen owns 3000 preferred shares of ABC Inc., and she is thinking of selling...

10. Aunt Kathleen owns 3000 preferred shares of ABC Inc., and she is thinking of selling 100 of these shares to pay for a new computer. These shares pay a stable quarterly dividend of $0.65 per share (i.e., there will be four dividend payments in a year, and each payment is $0.65 per share). Aunt Kathleen’s required return is 12% APR compounded semi-annually.

  1. What is the effective annual return (EAR) based on an APR of 12% compounded semi-annually?   (1 mark)
  2. What is the effective return per dividend payment period for Aunt Kathleen? (1 mark)
  3. What is the estimated stock price based on the Constant Dividend model?  
  4. What is the maximum amount of money that Aunt Kathleen can spend on the new computer if she only uses the receipts from the sale of 100 shares of ABC’s preferred shares to pay for it?                    (1 mark)

Homework Answers

Answer #1

a) Effective Annual Return = (1+ 0.12/2)2 - 1 = 12.36%

b) Effective return per dividend payment period ( i.e Quarterly) =

  (1+ X/4)4 -1 = 12.36%

1 + X/4 = (1.1236)1/4

1+ X/4 = 1.02956

X = 0.02956 *4

X = 11.824 annually or 2.956% Quartrely

c) Estimated Stock price = Dividend ( Constant Payments) / Discount Rate

= 0.65/ 2.956%

= $ 219.89   

d) Max. money she can spent on Computer = 100 Shares * Share Price ( $ 219.89) = $21,989

Happy Learning!

Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
What is ABC Inc.'s effective annual WACC given the following information? ABC has no outstanding preferred...
What is ABC Inc.'s effective annual WACC given the following information? ABC has no outstanding preferred stock ABC does not pay any dividends ABC has one issue of 10,000 bonds outstanding, each priced at $667.15. The bonds have a face value of $1000, pay semi-annual coupons at a rate of 9% APR compounded semi-annually, and mature in 15 years. The next coupon payment is 6-months from today. ABC has 1,000,000 common stock shares outstanding, each priced at $16 per share....
You own 100 shares of ABC Inc. ABC will pay a dividend of $2 1 year...
You own 100 shares of ABC Inc. ABC will pay a dividend of $2 1 year from today and it will then pay a final liquidating dividend of $140 2 years from today. The required rate of return on ABC stock is 9.4 percent per year compounded annually. What is the price of ABC stock today?
The Bluefield Corporation has 6 million shares of common stock outstanding, 600,000 shares of preferred stock...
The Bluefield Corporation has 6 million shares of common stock outstanding, 600,000 shares of preferred stock that pays an annual dividend of $8.00, and 200,000 - $1000 par value bonds with a 10% coupon. The bonds pay interest semi-annually, and have 20 years to maturity. At present, the common stock is selling for $50 per share, the bonds for $950.62 each, and the preferred stock at $74 per share. The estimated required rate of return on the market is 13%,...
Dividends on Preferred and Common Stock Pecan Theatre Inc. owns and operates movie theaters throughout Florida...
Dividends on Preferred and Common Stock Pecan Theatre Inc. owns and operates movie theaters throughout Florida and Georgia. Pecan Theatre has declared the following annual dividends over a six-year period: 20Y1, $20,000; 20Y2, $40,000; 20Y3, $90,000; 20Y4, $115,000; 20Y5, $145,000; and 20Y6, $180,000. During the entire period ended December 31 of each year, the outstanding stock of the company was composed of 25,000 shares of cumulative, preferred 2% stock, $100 par, and 100,000 shares of common stock, $5 par. Required:...
PLEASE SOLVE THE NEXT 3 PROBLEMS WITH CALCULATION 1. Jim owns shares of Abco, Inc. preferred...
PLEASE SOLVE THE NEXT 3 PROBLEMS WITH CALCULATION 1. Jim owns shares of Abco, Inc. preferred stock which he says provides him with a constant 6.58 percent rate of return. The stock is currently priced at $45.60 a share. What is the amount of the dividend per share? Round to the nearest cent. Do not include the dollar sign in your answer. (i.e. If your answer were $1.23, then type 1.23 without a $ sign) 2. A firm is planning...
Dividends on Preferred and Common Stock Pecan Theatre Inc. owns and operates movie theaters throughout Florida...
Dividends on Preferred and Common Stock Pecan Theatre Inc. owns and operates movie theaters throughout Florida and Georgia. Pecan Theatre has declared the following annual dividends over a six-year period: Year 1, $32,000; Year 2, $64,000; Year 3, $144,000; Year 4, $176,000; Year 5, $224,000; and Year 6, $288,000. During the entire period ended December 31 of each year, the outstanding stock of the company was composed of 40,000 shares of cumulative preferred 2% stock, $100 par, and 100,000 shares...
Dividends on Preferred and Common Stock Pecan Theatre Inc. owns and operates movie theaters throughout Florida...
Dividends on Preferred and Common Stock Pecan Theatre Inc. owns and operates movie theaters throughout Florida and Georgia. Pecan Theatre has declared the following annual dividends over a six-year period: Year 1, $16,000; Year 2, $32,000; Year 3, $72,000; Year 4, $92,000; Year 5, $116,000; and Year 6, $144,000. During the entire period ended December 31 of each year, the outstanding stock of the company was composed of 20,000 shares of cumulative preferred 2% stock, $100 par, and 100,000 shares...
Dividends on Preferred and Common Stock Pecan Theatre Inc. owns and operates movie theaters throughout Florida...
Dividends on Preferred and Common Stock Pecan Theatre Inc. owns and operates movie theaters throughout Florida and Georgia. Pecan Theatre has declared the following annual dividends over a six-year period: Year 1, $30,000; Year 2, $60,000; Year 3, $135,000; Year 4, $173,000; Year 5, $210,000; and Year 6, $270,000. During the entire period ended December 31 of each year, the outstanding stock of the company was composed of 25,000 shares of cumulative preferred 3% stock, $100 par, and 100,000 shares...
Dividends on Preferred and Common Stock Pecan Theatre Inc. owns and operates movie theaters throughout Florida...
Dividends on Preferred and Common Stock Pecan Theatre Inc. owns and operates movie theaters throughout Florida and Georgia. Pecan Theatre has declared the following annual dividends over a six-year period: Year 1, $16,000; Year 2, $48,000; Year 3, $72,000; Year 4, $92,000; Year 5, $112,000; and Year 6, $144,000. During the entire period ending December 31 of each year, the outstanding stock of the company was composed of 20,000 shares of cumulative, 2% preferred stock, $100 par, and 100,000 shares...
Dividends on Preferred and Common Stock Pecan Theatre Inc. owns and operates movie theaters throughout Florida...
Dividends on Preferred and Common Stock Pecan Theatre Inc. owns and operates movie theaters throughout Florida and Georgia. Pecan Theatre has declared the following annual dividends over a six-year period: Year 1, $40,000; Year 2, $80,000; Year 3, $180,000; Year 4, $220,000; Year 5, $290,000; and Year 6, $360,000. During the entire period ended December 31 of each year, the outstanding stock of the company was composed of 25,000 shares of cumulative preferred 4% stock, $100 par, and 100,000 shares...