i.Fred Tibbits has made a detailed study of the denim clothing industry. He\'s p

Question

i.Fred Tibbits has made a detailed study of the denim clothing industry. He's particularly interested in a company called Denhart Fashions that makes stylish denim apparel for children and teenagers. Fred has done a forecast of Denhart's earnings and looked at its dividend payment record. He's come to the conclusion that the firm will pay a dividend of $5.00 for the next two years followed by a year at $6.50. Fred's investment plan is to buy Denhart now, hold it for three years and then sell. He thinks the price will be about $75 when he sells. What is the most Fred should be willing to pay for a share of Denhart if he can earn 10% on investments of similar risk?

ii.Blackstone Corporation's $7 preferred was issued five years ago. The risk-appropriate interest rate for the issue is currently 11%. What is this preferred stock selling for today?

iii.Fox Woodworking Inc. issued preferred shares at a face value of $50 to yield 9% 10 years ago. The shares are currently selling at $60. What return are they earning for investors who buy them today?

Explanation / Answer

i.

He should pay the present value of the future payments

Find the present value of the dividend and selling price

PV = 5/(1+0.1)^1 + 5/(1+0.1)^2 + 6.5/(1+0.1)^3 + 75/(1+0.1)^3 = 69.91

The most he can pay = $69.91

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