12. The preferred stock of ACE pays a constant $2.00 per share dividend. The com

Question

12. The preferred stock of ACE pays a constant $2.00 per share dividend. The common stock of ACME just paid a $2.00 dividend per share, but its dividend is expcted to grow at 3 percent per year forever. ABLE common stock also just paid a dividend of $2.00 per share, but its dividend is expected to grow at 20 percent over the next year and then grow at 3 percent per year forever All three stocks have a 10 percent required return. How much should you be willing to pay for a share of each stock? sldenso

Explanation / Answer

ACE Preffered stock price =Dividend/Required return=2/.10=$20 Per Share

ACME Common Stock Price = D1/(ke-g) =(2*1.03)/(.10-.03)=$29.43 Per Share

ABLE Common Stock price=2*1.20*1/(1/(1+.10)^1+(1.10*1.03)/(0.03-0.10) =$37.50  Per Share

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