Woidtke Manufacturing\'s stock currently sells for $32 a share. The stock just p

Question

Woidtke Manufacturing's stock currently sells for $32 a share. The stock just paid a dividend of $2.25 a share (i.e., D0 = $2.25), and the dividend is expected to grow forever at a constant rate of 5% a year.

What stock price is expected 1 year from now?

What is the estimated required rate of return on Woidtke's stock? Round the answer to three decimal places. %

AND Question 2

What is the required rate of return on a preferred stock with a $50 par value, a stated dividend of 7% of par, and a current market price of (a) $59, (b) $78, (c) $96, and (d) $139 (assume the market is in equilibrium with the required return equal to the expected return)? Round the answers to two decimal places.

Explanation / Answer

Require rate of return = 2.25*(1+5%)/32+5%

=12.383%

Price of the stock next year = 2.25*(1+5%)^2/(12.38%-5%)

=$33.61

---------------------------------------------------------------------------------------------------------------------

a) Rate of return = 7%*50/59

=5.93%

b) Rate of return = 7%*50/78

=4.49%

c) rate of return = 7%*50/96

=3.65%

d) Rate of return = 7%*50/139

=2.52%

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