18. North Park International LLC has issued preferred stock ($65 par value) that

Question

18. North Park International LLC has issued preferred stock ($65 par value) that pays an annual dividend of $5.80. The preferred stock matures in 20 years. At that time, holders of the stock will receive, at their option, either $65 or one share of common stock with a value up to $90. If the common stock is trading at a price above $90, the preferred stockholders will receive a fractional share of common stock worth $90. The current common stock pays a $1.5 per share dividend. This dividend is expected to grow at a 3 percent rate per year for the next 20 years. If the market requires a 24% rate of return on a stock of this risk and maturity, what is the maximum value for which the share can be expected to trade?

                A. $25.06

                B. $136.12

                C. $23.84

                D. $24.72

Explanation / Answer

PV factor Preference Present Value Year at 24% Cash flow of Pref cashflow 1 0.8064516 5.8 4.68 2 0.6503642 5.8 3.77 3 0.5244873 5.8 3.04 4 0.4229736 5.8 2.45 5 0.3411077 5.8 1.98 6 0.2750869 5.8 1.60 7 0.2218443 5.8 1.29 8 0.1789067 5.8 1.04 9 0.1442796 5.8 0.84 10 0.1163545 5.8 0.67 11 0.0938343 5.8 0.54 12 0.0756728 5.8 0.44 13 0.0610264 5.8 0.35 14 0.0492149 5.8 0.29 15 0.0396894 5.8 0.23 16 0.0320076 5.8 0.19 17 0.0258126 5.8 0.15 18 0.0208166 5.8 0.12 19 0.0167876 5.8 0.10 20 0.0135384 70.8 0.96 Total 24.72 Answer: D. 24.72

Related Questions

Navigate

• Browse (All)
• Browse 1
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.