Question

1. Preferred stock has a dividend of $12 per year. The required return is 6%. What should be the price per share?
2. Hurricane Corporation expects to grow its dividend by 5% per year. The current dividend is $2 per share. The required return is 8%.
3. 1. What is the estimated value of a share of common stock?
   2. If the price is $40 and dividends were $1.50 per share but expected to grow at 4% per year, what would be the required rate of return?   
4. Compute the expected return for the following investment

State of nature           Probability                   Return

                              Boom                    25%                             20%

                              Average                 60%                             8%

                              Recession             15%                             0%

5. The following are the expected returns on a portfolio of investments.    What is the expected rate of return on the portfolio?

Investment        # of shares         Price per share         Expected return

A.                    2000                            $20                              10%

B.                    3000                            $10                              15%

             C.                    1000                            $15                              8%

6. You take out a $200,000 mortgage for 20 years at 6%.

What is your monthly payment?

What is the principal and interest on the first payment?

What is the principal and interest on the twelfth payment?

How much interest will you pay over the 20 years?

7. You bought a house 8 years ago with a $250,000 mortgage. It was a 15-year loan with monthly payments which will pay off the loan when you make the last payment. The interest rate was 6%. What are your monthly payment and your current loan balance? How much interest will you pay in the upcoming year?  

Answer 1

1-	price per share	preferred dividend/required rate of preferred stock	12/6%	200
2-	estimated value of common stock = Expected dividend/(required rate -growth rate)	(2*1.05)/(8%-5%)		70
3-	required rate of return = (expected dividend/market price)+growth rate	(1.5*1.04)/40))+4%		7.90%
4-	state of nature	probability	return	probability*return
	Boom	25%	20%	5.00%
	Average	60%	8%	4.80%
	recession	15%	0%	0.00%
	return on Investment = sum of probability*return			9.80%
5-	Investment	value of investment = no of shares*price per share	Weight of portfolio	expected return	weight*expected return
	A	40000	0.470588235	10%	0.04705882
	B	30000	0.352941176	15%	0.05294118
	C	15000	0.176470588	8%	0.01411765
	total	85000
	portfolio return = sum of weight*expected return				11.41%