Finance Test 2 Chapter 8

# Finance Test 2 Chapter 8 - StockA StockB 5.5 4.75 40 42...

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Preferred Stock Expected Return Preferred Sto You are buying 300 shares and must choose Stock A or Stock B dividend rate par value Stock A Stock B discount rate Annual Dividend 5.5 4.75 Selling Price 40 42 .11 X 100 Required Rate of return is 12% 11/0.16 Expected Rate of Return for A Preferred Stock is  5.50/40 13.75% 11.31% Choose which one is greater Measuring Growth Achieve 4% growth rate It Can achieve 15% ROE Growth Divided by ROE 26.67%

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ock Valuation 11% dividend rate 6%  \$100.00  par value  \$500.00  16% discount rate 6% \$11  .11 X 100 \$28  \$68.75  11/0.16 \$500.00  68.75 Preferred Stock is  68.75
Common Stock Evaluation Part 2 Find Growth Rate Return on Equity 15.00% Dividend Retains for Investment  60% Selling for Paid dividend 4 Required ROE Selling for 45 Growth rate  41 = 1.75 * (1+g)  / 0.11 -g ROE X Retains 9.00%

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Unformatted text preview: Expected Return 41 * (0.11-g) = 1.75 * (1+g) Dividend + (1+.09) 4.51 -41g = 1.75 + 1.75g \$4.36 2.76 = 42.75g 4.36 divided by selling for plus growth rate g=6.46 18.69% If you require 12%, should you invest If expeted rate is greater than 12% Part 3 How much Appreciate \$1.75 purchased at \$53 \$41.00 Dividend paid 1 year \$4.75 11% Required ROE 14% 53 = 4.75/(1+0.14) + Price in year 1 / (1 +ROE) Price in year 1 = 53(1+0.14) - 4.75 \$55.67 55.67-53 / 53 X 100 5.04% purchased at \$53 Dividend paid 1 year \$4.75 Required ROE 14% 53 = 4.75/(1+0.14) + Price in year 1 / (1 +ROE) Price in year 1 = 53(1+0.14) - 4.75 \$55.67 49.5 5.5 15% Price in year = 49.50 (1+0.15) - 5.50 56.93 51.43...
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