A) A stock is expected to pay a dividend of $2.00 the end of the year (that is,

Question

A)

A stock is expected to pay a dividend of $2.00 the end of the year (that is, D1 = $2.00), and it should continue to grow at a constant rate of 10% a year. If its required return is 13%, what is the stock's expected price 1 years from today? Round your answer to two decimal places.

B)

Preferred stock valuation

Fee Founders has perpetual preferred stock outstanding that sells for $42.00 a share and pays a dividend of $4.00 at the end of each year. What is the required rate of return? Round your answer to two decimal places.

Explanation / Answer

A)

Stock price, P1 = D2÷(r-g)

D1 is next expected dividend

r is required return

g is growth rate

= $2×(1+10%)÷(13%-10%)

= $73.33

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