7A). Preferred stock has a dividend of $12 per year. The required return is 6%.

Question

7A). Preferred stock has a dividend of $12 per year. The required return is 6%. What should be the price per share?

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7B-C). Hurricane Corporation expects to grow its dividend by 5% per year. The current dividend is $2 per share. The required return is 8%.

B. What is the estimated value of a share of common stock?

C. If price is $40 and dividends were $1.50 per share but expected to grow at 4% per year, what would be the required rate of return

Explanation / Answer

A.

Cost of preferred equity

Cost of preferred equity =Dividend/Price

.06=12/Price

Price=200

B.

Stock price =Next year’s dividend/(Required rate-growth rate)

Next year’s dividend = 2*1.05=2.10

Stock price =2.10(8-5)=.7 % =70

C.

Price =40

Dividend =1.50 per share

Dividend next year =1.5 * 1.04 =1.56

40=1.56/(R-4)

R =4.039

Required rate of return = 4 %

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