1A) Which of the following statements correctly describe a preferred stock? (1)

Question

1A) Which of the following statements correctly describe a preferred stock?

(1) Owners of preferred stock enjoy the same rights in liquidation as debt holders

(2) Most preferred stocks have no maturity date

(3) A preferred stock dividend can be skipped; however, all past and current dividends must be paid prior to the payment of common shareholder dividends

(4) Companies that purchase the preferred stock of other companies are permitted to exclude some of that income from their federal income tax computations.

1, 3 and 4

2, 3 and 4

3 and 4

1, 2 and 3

1B) What is the price of a preferred stock given that it pays a cumulative preferred dividend of $4.25 if the market required rate of return is 8.4%?

$53.13

$42.50

not enough information is given

$50.60

1C) The current dividend (Do) from Films, Inc. is $1.14 per share. Dividends have been growing at a constant rate of 7% per year, and this trend is expected to continue. If the required rate of return is 10%, what is the maximum price an investor should pay for the stock?

$43.32

$40.67

$38.00

$12.67

1D) Starduster Productions, Inc. stock is currently selling for $38. The company’s next annual dividend is expected to be $1.00 per share. Dividend growth has been at a steady rate of 5%, and it is expected to continue at that rate. If you buy Starduster stock at the current price, what is the expected 1 year total return?

2.63%

7.76%

7.63%

5.25%

1, 3 and 4

2, 3 and 4

3 and 4

1, 2 and 3

Explanation / Answer

1A)correct option is "C" - 3 & 4

(3) A preferred stock dividend can be skipped; however, all past and current dividends must be paid prior to the payment of common shareholder dividends

(4) Companies that purchase the preferred stock of other companies are permitted to exclude some of that income from their federal income tax computations.

1B)Price = Dividend/Rate of return

      = 4.25/.084

         = $ 50.60

Correct option is "D"

1C)Price = D0(1+g)/(Rs-g)

      = 1.14(1+.07)/(.10-.07)

       = 1.14 * 1.07 / .03

        = $ 40.66

correct option is " B"

1D)expected return = [D1/price] +growth

         = [1/38] + .05

           = .0263+.05

         = .0763 or 7.63%

correct option is "C" - 7.63%

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