Question

1. The preferred stock of Dragons Inc. pays a $1 dividend. What is the value of the stock if your required rate of return is 10 percent?
2. Mosser Corporation, Inc. paid a $4 dividend last year. At a constant growth rate of 6 percent, what is the value of the common stock if the investors require a 10 percent rate of return?
3. HomeNet Inc. paid a $3 last year and the stock is currently selling for $60. If investors require a 12% return on their investment from buying HomeNet stock, what growth rate would HomeNet have to provide the investors?
4. What are the limitations of the dividend discount model?
5. Preferred stock is often referred to as hybrid security because it has many characteristics of both common stock and bonds. What are the characteristics similar to common stocks; what are the characteristics similar to bonds? Explain.

*Answer all questions for a thumbs up.

Answer 1

If dividend paid $1 and required rate of return is 10% then common stock value is $10.

1×100/10 = $10

If dividend paid $ 4 last year with constant growth 6% then value of common stock is as 4 × 1.06 = 4.24 and required rate of return is 10% than value of common stock is. $4.24 /(10% - 6%) = $106.

If the dividend last year $3 and stock current price is $60 and reuired rate of return is 12% then growth rate will be as 0.12 - 3/60 = 0.07 or 7%

Limitations of of dividend discounted model is as 1. Many exemption required like growth rate discounted factors.

2. Ignore buy back effect of the stocks effects that can be e make a difference in required to stock value

3. must pay dividend it cannot used to evaluate the stock that don't pay dividend.

Character sketch of common stock

1. Higher yield : hybrid security and generally placed in capital structure and offer a higher rate of return then securities

2. Less volatility in the market : hybrid security have less volatility in the market because the AP regular pre-determined distributions of market returns

Character skits of the bonds as a hybrid security

A hybrid security is single financial security that combines two or more different financial instrument hybrid security often referred as a hybrid generally combine both debt and equity characters. The most common it is convertible bond that has features of an ordinary bond but is heavily influenced by the price moment of the stock into which it is converted.