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13 Feb 2019

What is the value of a preferred stock that pays a perpetual dividend of $150 at the end of each year when the interest rate is 7 percent?

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15 Feb 2019

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Related questions

Homework Chapter 7 Question 11

A stock was priced at $150 per share at the end of 2005. The following table shows dividends per share paid during each year and the price of the stock at the end of the year for the following four years. Year Dividends Paid During Year Stock Price at End of Year

2006 $3.00 $125
2007 $3.00 $150
2008 $3.50 $155
2009 $4.00 $200

For each year from 2006 to 2009, calculate the dividend yield, the capital gains yields, and the total return to the stock. Express your calculations in percentage terms.

Market shares of chocolate makers are in the table.


Firm

Market share
(percent)

Mayfair, Inc

15

Bond, Inc

10

Magic, Inc

25

All Natural, Inc

10

Truffles, Inc

25

Gold, Inc

15

a. Calculate the four firm concentration ratio.

b. Calculate the Herfindahl-Hirschman Index.

5. If the interest rate is 6 percent, what is the present value of a bond that matures in two years, pays $85 one year from now and $1,085 two years from now?

6. Suppose that eLake, an online auction site, is paying a dividend of $2 per share. You expect this dividend to grow 4 percent per year, and the interest rate is 10 percent.

a) What is the most you would be willing to pay for a share of stock in eLake?

b) If the interest rate is 6 percent, what is the most you would be willing to pay?

c) Comparing your answers to a and b, when interest rates decline, would you expect stock prices in general to rise or fall?

Richland Merchants is analyzing a proposed expansion project that is riskier than the firm's current operations. Due to the nature of the project, the firm has stated that the project will be assigned a discount rate equal to the firm's cost of capital plus 3.5 percent. The company wants to build a new distribution center on leased land at a cost of $16.5 million dollars that will be depreciated on a straight-line basis over 20 years. An additional $145,000 is required for developmental design plans and consulting fees. The center will require an increase in current assets of $1.3 million during the project's life. These assets will be recouped at the end of the project. Management estimates that the facility will generate sales of $3.1 million a year over its 20-year life. At the end of 20 years, the company plans to sell the facility for an estimated $20 million. The company has 70,000 shares of common stock outstanding at a market price of $43 a share. This stock just paid an annual dividend of $2.10 a share. The dividend is expected to increase by 3 percent annually. The firm also has 8,000 shares of 5 percent preferred stock with a market value of $62 a share. The preferred stock has a par value of $100. The company has a 7 percent, semiannual coupon bond issue outstanding with a total face value of $1.3 million. The bonds are currently priced at 99.5 percent of face value and mature in 13 years. The tax rate is 34 percent. Should Richland Merchants pursue the expansion at this point in time? Why or why not? Use NPV and IRR.

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