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1)A stock is trading at $80 per share
1)A stock is trading at $80 per share. The stock is expected to have a year-end dividend of $3 per share (D1 = $3), and it is expected to grow at some constant rate g throughout time. The stock's required rate of return is 13% (assume the market is in equilibrium with the required return equal to the expected return). What is your forecast of g? Round the answer to three decimal places.
2)What is the required rate of return on a preferred stock with a $50 par value, a stated annual dividend of 12% of par, and a current market price of (a) $68, (b) $84, (c) $110, and (d) $135 (assume the market is in equilibrium with the required return equal to the expected return)? Round the answers to two decimal places.
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Expert Solution
1)Required return=(D1/Current price)+Growth rate
0.13=(3/80)+g
g=0.13-(3/80)
=9.25%
2)Annual dividend=50*12%=$6
Required rate of return=Annual dividend/Current value
| a. | (6/68)=8.82%(Aprox) |
| b. | (6/84)=7.14%(Approx) |
| c. | (6/110)=5.45%(Approx) |
| d. | (6/135)=4.44%(Approx) |
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