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.

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. (5 pts)

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? (10 pts)

Explanation / Answer

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.

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