Question

In: Finance

Having the following data:- A $100.0 par value preferred stock with 10.0% dividend & a 15.0%...

Having the following data:-

A $100.0 par value preferred stock with 10.0% dividend & a 15.0% required return.

A $1.0 par value common stock with $3.0 EPS; a 5.0% risk-free rate; a 6.0% Market Risk-Premium; a 40.0% pay-out ratio; a 5.0% constant growth in EPS & dividend per share (g); Beta is 1.40.

A 20 years 6.0% coupon debenture (Non-guaranteed corporate bond) with a Yield-to-maturity (YTM) of 5.0%.

Answer the following questions:-

1 - The preferred stock's price is ???

2 - The common stock's price is ???

3 - The required return on the market is ????

4 - The debenture's price is ????

5 - The debenture's discount / premium is???

Expert Solution

Q1) price of preferred stock = dividend% × par value / cost of preferred stock

= 10% * 100 / 0.15

= 10 / 0.15

= $66.67

Q2) EPS = $3

Payout ratio = 40%

Dividend= payout ratio × EPs

= 40% × 3

= $1.2

Expected return= risk free rate + beta (market risk premium

= 5% + 1.4 (6%)

= 5% + 8.4%

= 13.4%

Price = dividend paid (1+growth rate) / Cost of equity - growth rate

= 1.2 (1+0.05) / 0.134 - 0.05

= 1.2(1.05) / 0.084

= 1.26/0.084

= $15

C) Expected return = risk free rate + beta (market return - risk free rate)

13.4% = 5% + 1.4 (market return - 5%)

13.4% - 5% = 1.4 market return - 7%

8.4% + 7% = 1.4 market return

Market return= 15.4% / 1.4

= 11%

D) Using financial calculator to calculate the price of debenture

Inputs: N= 20

I/y= 5%

Pmt= 6% × 1,000 = 60

Fv= 1,000

We get, the Price of debenture as $1,124.62

E) The debenture is issued at a premium, as the present value is more than face value or par value and also because ytm is less than coupon rate. The debenture is issued at a premium of $124.62 or 112.462% of face value or par value.

jeff jeffy answered 1 year ago

COST OF PREFERRED STOCK 15. A preferred stock paying a 7.5% dividend on par value ($100...

COST OF PREFERRED STOCK 15. A preferred stock paying a 7.5% dividend on par value ($100 Par) can be sold to net $65 per share. Tax rate is 34%. What is the cost of preferred stock to the firm? 16. Compute the cost of internal equity (or retained earnings) when the current market price of the common stock is $32. The expected dividend this forthcoming year is $1.75 increasing thereafter at a 6.5% annual rate.

A preferred stock with a $25 par value pays an annual dividend of 8% and is...

A preferred stock with a $25 par value pays an annual dividend of 8% and is currently trading for $18 per share. What is the annualized return being demanded by investors? AT&T stock (T) just paid an annual dividend of $1.75 for the most recent year. The current stock price is $38. Assuming investors expect a constant growth rate in dividends of 6% into perpetuity, what is the implied required return being demanded by investors?

Soap Inc.'s $100 par value preferred stock pays a dividend fixed at 5% of par. To...

Soap Inc.'s $100 par value preferred stock pays a dividend fixed at 5% of par. To earn 10% on an investment in this stock, you need to purchase the shares at a per share price of? $80.0 $62.5 $50.0 $75.7

Problem 8 A share of preferred stock has a par value of $100, an annual dividend...

Problem 8 A share of preferred stock has a par value of $100, an annual dividend of 2% and a current market price of $65. Part 1 What is the rate of return on the preferred stock?

The following information pertains to Parsons Co.: Preferred stock, cumulative: Par value per share $100 Dividend...

The following information pertains to Parsons Co.: Preferred stock, cumulative: Par value per share $100 Dividend rate 8% Shares outstanding 10,000 Dividends in arrears none Common stock: Par value per share $10 Shares issued 125,000 Dividends paid per share $2.10 Market price per share $47.50 Additional paid-in capital $510,000 Unappropriated retained earnings (after closing) $270,000 Retained earnings appropriated for contingencies $310,000 Common treasury stock: Number of shares 10,000 Total cost $240,000 Net income $616,000 . Compute (assume no changes in...

Joe has common stock and preferred stock outstanding. The preferred stock has a par value of...

Joe has common stock and preferred stock outstanding. The preferred stock has a par value of $100, a dividend rate of 4.5%, and is cumulative. During the past 3 years, Joe declared and paid dividends provided at left. Compute the amount of dividends paid to preferred and common shareholders each year. Preferred stock: Par value $100 Dividend rate 4.5% Shares outstanding 100,000 Dividends declared and paid: Year 1 400,000 Year 2 100,000 Year 3 1,250,000

Sata Limited just issued some 12% preferred stock each having a par value of $ 1,000....

Sata Limited just issued some 12% preferred stock each having a par value of $ 1,000. The stock does not have any maturity and hence it will provide annual dividends for an infinite amount of time in the future. If the investors require an 8 percent return on the company's preferred stock, what should be the current price of the company's preferred stock?

Richardson Enterprises, Inc. offers $120 par-value preferred stock that pays a 11% annual dividend. How much...

Richardson Enterprises, Inc. offers $120 par-value preferred stock that pays a 11% annual dividend. How much are you willing to pay for one share of this stock if you want to earn 12.8 percent on an equity investment of this level of risk?

Preferred dividends Acura Labs Inc. has an outstanding issue of preferred stock with a par value...

Preferred dividends Acura Labs Inc. has an outstanding issue of preferred stock with a par value of $6060 and an 2020% annual dividend. a. What is the annual dollar dividend? If it is paid quarterly, how much will be paid each quarter? b. If the preferred stock is noncumulative and the board of directors has passed the preferred dividend for the last 44 quarters, how much must be paid to preferred stockholders in the current quarter before dividends are paid...

The preferred stock of Dragons Inc. pays a $1 dividend. What is the value of the...

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? 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? HomeNet Inc. paid a $3 last year and the stock is currently selling for $60. If investors require a...