Answer the following questions and put calculations: 22. What is the rate of ret
ID: 2790278 • Letter: A
Question
Answer the following questions and put calculations:
22. What is the rate of return on a preferred stock that has a par value of $50, a market price of $46.50, and a dividend of $4.10?
a.8.20%
b.11.34%
c.8.82%
d.12.20%
23. George Franks can buy shares of Ace Rocket Launcher (ARL) for $45.00. George expects dividends to be $3.00 in one year and $5.00 in two years, and he expects to sell the stock for $58.00 in two years. Should George buy any shares of ARL? George feels that 18 percent is the appropriate required rate of return.
24. The Rich Company has a dividend growth rate of 14 percent, a current share price of $56.00, and a current dividend of $1.50. What is the required rate of return for Rich Company shares?
25. Because of a lucky breakthrough, Philadelphia Pharmaceutical’s current dividend per share of $2.00 is expected to grow at a very high 32 percent per year for the next three years and then to grow at a more normal 6 percent per year. What is the value of a Philadelphia share if the investors’ expected return is 20 percent?
Explanation / Answer
1-
rate of return on preferred stock
(expected preferred dividend/market price)*100
(4.1/46.5)*100
8.82
expected dividend on preferred stock
4.1
market price
46.5
2-
Year
cash flow
present value of cash flow = cash flow/(1+r)^n r= 18%
1
3
2.542373
2
5
3.590922
2
58
41.6547
value of share
sum of present value of cash flow
47.78799
it should be purchased as its present value is 47.79 which is more than the market price of 45
3-
current dividend
1.5
growth rate
14%
current price
56
expected dividend
1.5*1.14
1.71
required rate of return on share
(expected dividend/market price)+growth rate
(1.71/56)+.14
required rate of return on share
17.05%
4-
Year
formula = current year dividend*(1+r)^n
Expected dividend
0
2
1
2*1.32^1
2.64
2
2*1.32^2
3.4848
3
2*1.32^3
4.599936
4
4.5999*1.06
4.875932
value of share
expected dividend at year 4/(required rate of return-growth rate)
4.8759/(20%-6%)
value of share
34.82786
Year
cash flow
present value of cash inflow= cash inflow/(1+r)^n r= 20%
1
2.64
2.2
2
3.4848
2.42
3
4.599936
2.662
3
34.82786
20.15501
present value of share
present value of share
27.43701
1-
rate of return on preferred stock
(expected preferred dividend/market price)*100
(4.1/46.5)*100
8.82
expected dividend on preferred stock
4.1
market price
46.5
2-
Year
cash flow
present value of cash flow = cash flow/(1+r)^n r= 18%
1
3
2.542373
2
5
3.590922
2
58
41.6547
value of share
sum of present value of cash flow
47.78799
it should be purchased as its present value is 47.79 which is more than the market price of 45
3-
current dividend
1.5
growth rate
14%
current price
56
expected dividend
1.5*1.14
1.71
required rate of return on share
(expected dividend/market price)+growth rate
(1.71/56)+.14
required rate of return on share
17.05%
4-
Year
formula = current year dividend*(1+r)^n
Expected dividend
0
2
1
2*1.32^1
2.64
2
2*1.32^2
3.4848
3
2*1.32^3
4.599936
4
4.5999*1.06
4.875932
value of share
expected dividend at year 4/(required rate of return-growth rate)
4.8759/(20%-6%)
value of share
34.82786
Year
cash flow
present value of cash inflow= cash inflow/(1+r)^n r= 20%
1
2.64
2.2
2
3.4848
2.42
3
4.599936
2.662
3
34.82786
20.15501
present value of share
present value of share
27.43701
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