A.Many years ago, minnow Bait and Tackle issued preferred stock. The stock pays

Question

A.Many years ago, minnow Bait and Tackle issued preferred stock. The stock pays an annual dividend equal to $6.80. If the required rate of return on similar-risk investments is 8 percent, what should be the market value of Minnow's preferred stock?


B.Advanced Corporation's growth has slowed to a constant rate during the past few years. As a result, the company expects its common stock dividend to grow at a constant 4 percent for the remainder of the company's life. A few days ago, Advanced paid common stockholders a $5 dividend. If the required rate of return on the company's stock is 12 percent, what is the value of the stock today?

Explanation / Answer

OK here's more detail The formula to calculate the value of preferred stock is the dividend (here $6.80) divided by the rate of return on similar investments (here .08). Divide the two and you get $85. The formula to calculate the value of a stock whose dividend is growing at a constant rate is Do(1+g)/(r-g) (It's called the Gordon Growth Model) where Do is current dividend g is the growth rate of the dividend r is the required rate of return on the company's stock So 5(1.04)/(.12-.04)= $65 Enough detail?

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