a. A firm has an issue of preferred stock outstanding that has a stated annual d

Question

a. A firm has an issue of preferred stock outstanding that has a stated annual dividend of $8. The required return on the preferred stock has been estimated to be 9 percent What is the value of the preferred stock? b. The LaBron Company has been very successful in the past four years. Over these years, it paid common stock dividend of $4 in the first year, $4.20 in the second year, $4.41 in the third year, and its most recent dividend was $4.63. The company wishes to continue this dividend growth indefinitely. What is the value of the company's stock ifthe required rate of return is 15percent? c. Sun Mountain Manufacturing has a beta of 1.60, the risk-free rate of interest is currently 6 percent, and the required return on the market portfolio is 11 percent. The company just paid a dividend of $3.00 per share and anticipates that its future dividends will increase at an annual rate of 12 percent for years one through three. Starting in year four the Company anticipates the dividends will grow at a rate of 8 percent and this rate will continue indefinitely into the future. What is the appropriate required rate of retum for an investment in this Company? What would be an efficient price for the Company's stock today?

Explanation / Answer

Answer: a

Value of preferred stock =8/0.09

=$88.888

Answer:b

growth rate is 5%

Value of company stock = dividend/Ke-g

=4.63/0.15-0.05

=46.30

Answer:c

Appropriate required rate of return=6%+1.60(11%-6%)

=14%

D0 =$3.00 per share

D1 =$3.36 (3*1.12)per share

D2 =$3.7632 (3.36*1.12)per share

D3 =$4.214784 (3.7632*1.12)per share

D4 =$4.55196672 (4.214784*1.08)per share

Price = $4.55196672/(14%-8%)

=$75.866

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