1) a) Warr Corporation just paid a dividend of $1.50 a share(that is,Do = $1.50)
ID: 2770522 • Letter: 1
Question
1) a) Warr Corporation just paid a dividend of $1.50 a share(that is,Do = $1.50). The Dividend is expected to grow 7 percent ayear for the next 3 years and then at 5 percent a year thereafter.What is the expected dividend per share for each of the next 5years?b) Fee Founders has perpetual preferred stock outstanding thatsells for $60 a share and pays a dividend of $5 at the end of eachyear. What is the required rate of return? a) Warr Corporation just paid a dividend of $1.50 a share(that is,Do = $1.50). The Dividend is expected to grow 7 percent ayear for the next 3 years and then at 5 percent a year thereafter.What is the expected dividend per share for each of the next 5years?
b) Fee Founders has perpetual preferred stock outstanding thatsells for $60 a share and pays a dividend of $5 at the end of eachyear. What is the required rate of return?
Explanation / Answer
(a) Dividend just paid (D0) =$1.50
Dividend is expected to grow7% a year for the next 3 years. Thus the
dividendgrowth rate for 3 years (g) = 7%
Dividend paid in1st year (D1) = $1.50 * (1.07) = $1.605
Dividend paid in2nd year (D2) = $1.605 * (1.07) =$1.717
Dividend paid in3rd year (D3) = $1.717 * (1.07) =$1.837
Dividend paid in4th year (D4) = $1.837 * (1.05) =$1.929
Dividend paid in5th year (D5) = $1.929 * (1.05) =$2.025
(b) Outstanding share value of preferred stock(P0) = $60 per share
Dividendamount (D0) = $5
Requiredrater of return (R ) = ?
Requiredrate of return (R) = D0 / P0
= $5 / $60
Requiredrate of return (R ) = 0.0833 (or) 8.33%
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.