True or false 1.Companies raise capital by issuing new securities in secondary m

Question

True or false

1.Companies raise capital by issuing new securities in secondary markets.

4.Preferred dividend payments are fixed amounts paid on a regular basis.

5.Preferred stock with no fixed maturity can be valued using the present value of a perpetuity formula.

6.The value of a supernormal growth stock is the present value of the mixed growth dividends plus the present value of the constant growth dividends.

17.Grant, Inc. is a fast growing company and its dividend is expected to grow at a rate of 25 percent for the next three years. It will then settle to a constant growth rate of 10 percent. If the last dividend was $5.00 and the required rate of return is 18 percent, what is the current price of the stock?

Explanation / Answer

1. False: Because Companies raise Capital by issue new securities in Primary Market.

4. True: Dividend to Preference shareholders are fixed and mentioned as a percentage of Share Face Value.

5. True: Formula used to calculate Present Value = Periodic Payment / Discounting Rate

6. True: A supernormal Growth Stock's today's worth can be calculated by calculating the present value of the future benefits.

17. Formula to Calculate Present Value:

Value of Stock at the End of 3rd Year = D1 / k - g

10.74216 / 0.18 - 0.10 = $134.277

So, the Price of the Stock at Present = $98.58

Year Dividend($) PV Factor(18%) Present Value 1 6.25 0.84745 5.29656 2 7.8125 0.71818 5.6107 3 9.7656 + 134.277 0.60863 87.6687 4 10.74216 Total 98.58

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