What is the value of a common stock if the firm\'s earnings and dividends are gr
ID: 2640070 • Letter: W
Question
What is the value of a common stock if the firm's earnings and dividends are growing annually at 10%, the current dividend is $1.32, and investors require a 15% return on investment? What is the stock's rate of return if the market price of the stock is $35? A firm has preferred stock outstanding with a $1,000 par value and a $40 annual dividend with no maturity. If the required rate of return is 9%, what is the price of the preferred stock? The market price of a firm's preferred stock is $24 and pays an annual dividend of $2.50. If the stock's par value is $1,000 and it has no maturity, what is the return on the preferred stock?
Explanation / Answer
Price of stcok(P0)= D1/r-g=(1.32+10%)/(15%-10%)=1.45/5%=$29
Rate of return=D1/P0+G=(1.45/35)+10%=14.14%.
Present value of a perpetuity= CF/rate of return=$40/9%=$444.44
Return on market price of prefferd stock = $2.5/$24=10.42%.
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