Value of a Preferred Stock A preferred stock from Duquesne Light Company (DQUPR
ID: 2736124 • Letter: V
Question
Value of a Preferred Stock A preferred stock from Duquesne Light Company (DQUPR pays $3.10 in annual dividends. If the required return on the preferred stock is 6.4 present, what's the value of the stock? Dividend Growth Annual dividends of General Electric (G grew from $0.75 in 2001 to $1.12 in 200 What was the annual growth rate? Expected Return Paychex In (PAYX) recently paid a $0.90 divided The dividend is expected to grow at a 6 present rat At a current stock price of $40.11, what is the return shareholders are expecting? Dividend Initiation and Stock Value A firm does not pay a divided It is expected to pay its first dividend of $0.35 per share in three years. This dividend will grow at 6 present indefinitely. Using an 11.5 present discount rate, compute the value of this stock. Variable Growth A fast growing firm recently paid a dividend of $0.25 per share The dividend is expected to increase at a 15 present rate for the next 4 years. Afterwards, a more stable 6 present growth rate can be assume If a 15 present discount rate is appropriate for this stock, what is its value?Explanation / Answer
1./
VALUE OF PREFERED STOCK
= DIVIDEND / REQUIRED RETURN
= $3.10 / 6.4%
= $48.4375
2./
ANNUAL GROWTH RATE
= [($1.12 / $0.75) 1/5 -1] * 100
= ($1.49 0.2 - 1 ) *100
= (1.0830 - 1) * 100
= 0.0830 *100
= 8.30%
3./
EXPECTED RETURN
= (D1 / P0) + GROWTH
= [($0.90 * 106%) / $40.11] + 6%
= $0.954 / $40.11 + 0.06
= 0.0238 + 0.06
= 0.0838 OR 8.38%
4./
VALUE OF STOCK AT YEAR 3
= D4 / (Ke - GROWTH)
= $0.371 / (11.5% - 6%)
= $0.371 / 5.5%
= $6.75
VALUE OF STOCK NOW
= $6.75 * PVIF 11.5%, 3 PERIODS
= $6.75 * 0.7214
= $4.87
5./
D0 = $0.25
D1 = $0.29
D2 = $0.33
D3 = $0.38
D4 = $0.44
D5 = $0.51
VALUE OF STOCK AT YEAR 4
= D5 / Ke - GROWTH
= $0.51 / (15% - 6%)
= $0.51 / 9%
= $5.67
VALUE OF STOCK NOW
= D1 * PVIF15%,1YR + D2 * PVIF15%,2YR + D3 * PVIF15%,3YR + D4 * PVIF15%,4YR + P4 * PVIF15%,4YR
=$0.29 * 0.8696 + $0.33 * 0.7561 + $0.38 * 0.6575 +$0.44 * 0.5718 + $5.67 * 0.5718
= $0.25 + $0.25 + $0.25 +$0.25 + $3.24
= $4.24
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