Stock Performance and Equity Investments
Problem 1
| Constant-Growth Common Stock | ||
| What is the value of a common stock if the firm's earnings and dividends are growing annually at 10%, the current dividend is $1.32, | ||
| and investors require a 15% return on investment? | ||
| value of common stock=(last year divided*(1+growth rate))/(Required rate-Growth rate) | ||
| $ 29.04 | ||
| What is the stock's rate of return if the market price of the stock is $35? | ||
| Expected rate of return=((Dividend in year 1*(1+growth rate))/market price)+growth rate | ||
| 1415% |
Problem 2
| Preferred Stock Price and Return | ||
| A firm has preferred stock outstanding with a $1,000 par value and a $40 annual dividend with no maturity. If the required rate of return is 9%, what is the price of the preferred stock? | ||
| Value (Vps)=Dividend/Required rate of return | ||
| $ 444.44 | ||
| The market price of a firm's preferred stock is $24 and pays an annual dividend of $2.50. If the stock's par value is $1,000 and it has no maturity, what is the return on the preferred stock? | ||
| Expected return=divided/market price | ||
| 10.42% |