Question

1.) XYZ Corporation's next dividend is expected to be $3 per share. Dividend growth rate has been at 2% and expected to be so into the future. If investor's return is 10%, calculate the stock price next year.

A) 37.50

B) 38.25

C) 38.50

D) 38.75

E) None of the above

Which of the following typically applies to preferred stock but not to common stock?

A) Par Value

B) Dividend yield

C) Cumulative dividends

D) It is legally considered equity

E) None of the above

Please write a detailed explanation as to why you got this answer and not the other answer

Answer 1

Answer to Question 1:

Correct Option is “$38.25”

Expected Dividend = $3.00
Growth Rate = 2%
Required Return = 10%

Current Stock Price = Expected Dividend / (Required Return - Growth Rate)
Current Stock Price = $3.00 / (0.10 - 0.02)
Current Stock Price = $3.00 / 0.08
Current Stock Price = $37.50

Stock Price Next Year = Current Stock Price * (1 + Growth Rate)
Stock Price Next Year = $37.50 * 1.02
Stock Price Next Year = $38.25

Answer to Question 2:

Correct Option is “cumulative dividends”

Both preferred stock and common stock has a par value.
Preferred stock and common stock is legally considered equity.
There are two types of preferred stock, cumulative and non-cumulative.
Preferred stock has preferential right of dividend over common stock. Dividend is first paid to preferred stockholders then if any to common stockholders.
Therefore, common stockholders may receive dividend or may. Any arrear dividends are not paid to common stockholders.