AirJet Best Parts, Inc. is concerned regarding recent changes in its stock price

Question

AirJet Best Parts, Inc. is concerned regarding recent changes in its stock prices for the company and would like to determine the stock prices for key competitors. Key competitors include Raytheon, Boeing, Lockheed Martin, and the Northrop Grumman Corporation.

1. Using the dividend growth model and assuming a dividend growth rate of 5%, what is the rate of return for one of three key competitors? Use Yahoo Finance to obtain the latest dividend amount and price for one selected company.

2. Using the rate of return above, what should be the current share price of AirJet Best Parts, Inc. if the company maintains a constant 1% growth rate in dividends and the most recent dividend per share paid on the stock was $1.50? Show your calculations.

3. Assume AirJet Best Parts has also a preferred stock issue. The most recent dividend per share paid on the stock was also $1.50, the same as the common stock. Which one would you think has a higher price, the preferred stock or the current stock? Explain your rationale.

4. What would happen with the price you computed above if AirJet Best Parts, Inc. announces that dividends at the end of the year will increase? What if the required rate of return increases? What changes in dividends will affect the stock price and how?

Explanation / Answer

1. Caculation of Required rate of return for Raytheon company: For Raytheon by using yahoo finance the dividend is $0.43 and sock price is $44.73. Required rate of return= Dividend(1+g)/Current stock price + g =0.43(1.05)/$44.73 + 0.05 =0.4515/$44.73 + 0.05 =0.06009 =6.009% Calculation of Required rate of return for Boeing company: For Boeing by using yahoo finance the dividend is $0.42 and Current stock price is $70.47 Required rate of return= $0.42(1.05)/$70.47 + 0.05 =0.0062 + 0.05 =0.0562 =5.63% Calculation of Required rate of return forLockheed Martin: Company dividend is $0.75 and Current stock price is $75.73 Required rate of return= $0.75/$75.73 + 0.05 =0.01 + 0.05 =0.06 =6% 2. Take the required rate of return for the Lockheed Martin is 6%. Therefore Market price per share forAirJet Best Parts calculation is as follows 6%= $1.50/Market price per share + 1% 6%- 1%= $1.50/Market price per share Market price per share= $1.50/5% =$1.50/0.05 =$30 3. Value of preferred stock= Dividend/Required rate of return =$1.50/6% =$1.50/0.06 =$25 Current sock price is higer. in Preferred stock we dont have growth. 4. If the dividends at the end of the year increases then the required rate of return also increases. The change in dividends affects stock prices as, if higher the dividends then stock prices will grow. Company dividend is $0.75 and Current stock price is $75.73 Required rate of return= $0.75/$75.73 + 0.05 =0.01 + 0.05 =0.06 =6% 2. Take the required rate of return for the Lockheed Martin is 6%. Therefore Market price per share forAirJet Best Parts calculation is as follows 6%= $1.50/Market price per share + 1% 6%- 1%= $1.50/Market price per share Market price per share= $1.50/5% =$1.50/0.05 =$30 3. Value of preferred stock= Dividend/Required rate of return =$1.50/6% =$1.50/0.06 =$25 Current sock price is higer. in Preferred stock we dont have growth. 4. If the dividends at the end of the year increases then the required rate of return also increases. The change in dividends affects stock prices as, if higher the dividends then stock prices will grow.

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.