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Q1 Fee Founders has perpetual preferred stock outstanding that sells for $82 a share a and pays a dividend of $5 at the end of each year
Q1 Fee Founders has perpetual preferred stock outstanding that sells for $82 a share a and pays a dividend of $5 at the end of each year. What is the required rate of return?
R= D/V = $5 \$82 =6.1%
Q2 Harrison Clothiers' stock currently sells for $42 a share. It just paid a dividend of $1 a share. The dividend is expected to grow at a constant rate of 6% a year. What is the required rate of return? What stock price is expected 1 year from now?
The stock price is P0=(1+g)=42(1.06)=44.52
Rate of retum
D1\p0+g =1(1.06) / 42 +6%= 8.5%
Expert Solution
Qa)
Return on preferred stock = Dividend/Price
=5/82
Return= 6.10%
QB)
Using Gordon ddm
Return= Dividend *(1+Growth )/share price + Growth
=1*(1+0.06)/42 + 0.06
= 0.0252380+0.06
Return = 8.52%
Price P1= Current price *(1+Growth)
=42*(1+0.06)
P1= 44.52
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