the carmar company has preffered stock that is selling at $22 per share and its
ID: 2776271 • Letter: T
Question
the carmar company has preffered stock that is selling at $22 per share and its preferred stockholders have a required return of 14.54%. The company has common stock too and expects to pay dividends of $1.10 per share in 2016, $1.00 in 2017, zero in 2018 and $1.05 in 2019. It also expects that the market price of its common stock in 2019 will be $37 per share. Common stockholders have a required rerun of 16%. (a) what dividend does the preferred stock pay? (b) what is the value of the common stock in 2015?
Explanation / Answer
Dividend of Preference Share= Cost of Preference share*Price(ex divididend)
Given: cost of Pref share 14.54%, Price (assume ex dividend)=$22
So, Dividend = 22*0.1454=3.20
So dividend per Preference Share is $3.20
b.
Year
2015
2016
2017
2018
2019
Discount factor@16%
1
0.862
0.743
0.641
0.552
Dividend
1.1
1
0
1.05
PV of Dividend
2.271
0.948
0.743
0.000
0.580
Share Price
37
PV of share Price
20.43
Total PV of Dividends & Share price
22.71
So current share price in 2015 = $22.71
Year
2015
2016
2017
2018
2019
Discount factor@16%
1
0.862
0.743
0.641
0.552
Dividend
1.1
1
0
1.05
PV of Dividend
2.271
0.948
0.743
0.000
0.580
Share Price
37
PV of share Price
20.43
Total PV of Dividends & Share price
22.71
So current share price in 2015 = $22.71
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