EverythingIsPumpkinSpice Co. wishes to estimate the value of its outstanding pre

Question

EverythingIsPumpkinSpice Co. wishes to estimate the value of its outstanding preferred stock. The preferred issue has a par value of $500 and pays an annual dividend of $27.50 per share. Similar-risk preferred stocks are currently earning an annual rate of return of 7.0%.

25.) What is the market value of the outstanding preferred stock?

a. $392.86

b. $469.25

c. $500.00

d. $62.50

26.) If the required return on similar-risk preferred stocks has dropped to 4.5%, what will be the value of the stock?

a. $22.50

b. $500.00

c. $611.11

d. $50.00

27.) Harvest Food Groups common stock paid a dividend of $4.50 per share last year. The company expects earnings and dividends to grow at a rate of 12% per year for the foreseeable future. What required rate of return for this stock would result in a price per share of $25?

a. 18.0%

b. 32.2%

c. 20.2%

d. 12.0%

28.) Mayflower Ship Building, Inc.s common stock paid a dividend of $2.00 per share last year. The company expects earnings and dividends to grow at a rate of 8% per year for the foreseeable future. What is the price of Mayflowers stock if their required rate of return was 11%?

a. $66.67

b. $72.00

c. $25.00

d. $27.75

29.) Turkey Growers and Sons most recent annual dividend was $4.00 per share (D0 = $4.00) and the firms required return is 8%. Find the market value of Turkey Growers shares when dividends are expected to grow at 10% annually for 2 years, followed by a 5% constant annual growth rate in year 4 to infinity.

a. $169.33

b. $142.64

c. $146.67

d. $161.33

For the firm shown in the following table, use the data given to estimate its common stock value employing price/earnings (P/E) multiples.

EXPECTED PS: $5.50

PRICE / EARNINGS MULTIPLE: 16.7

30.) What is the value of the firms common stock?

a. $3.04

b. $55.00

c. $167.00

d. $91.85

Explanation / Answer

25) Price of preferd stock= 27.50/.07= $392.857

a. $392.86

26) Price of preferd stock= 27.50/.045= $611.11

c. $611.11

27) Ke= 4.5x1.12/25 + .12= 32.16% or 32.2%

b. 32.2%

28) P= 2x1.08/(.11-.08)= $72

b. $72.00

29) P= 4x1.1/1.08+(4x1.1^2/1.08^2) + (4x1.1^2/1.08^3)+ [(4x1.1^2x1.05)/(.08-.05)1.08^3]= $ 146.67

c. $146.67

30) 16.7x5.5= 91.85

d. $91.85

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