a)toys rus plans on paying a dividend of $2.00 one year from today & dividends a

Question

a)toys rus plans on paying a dividend of $2.00 one year from today & dividends are projected to shrink at 6% indefinetly. The appropriate discount rate for this stock is 11%. what is an estimate for the share price of antiques us today?

b) now assume thattoys rus just paid a dividend of $2.00 which will grow at 20% for the first year. 10% for the second year and remain 7% thereafter. If the discount rate is 11%, what is the new estimate for antiques us stock price today?

c)toys r us also issued preferred stock with $70 par value and 10% annual dividend. The appropriate discount rate for its preferred stock is 9.5%. What is an estimate for the share price of toys r us PREFERRED stock today?

Please show all work for each section and how to get to the answer. thank you.

Explanation / Answer

a)

P= D1/(Ke-g)

P= 2/(.11-.06)= $40

b)

P= 2x1.2/1.11+(2x1.2x1.1/1.11^2)+[(2x1.2x1.1x1.07)/(.11-.07)1.11^2]

P= $62.14

c)

Price for prefered stock= dividend/r

P= 7/.095= $73.684

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