Preferredstockgenerallydoesnotcarry votingrights

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Unformatted text preview: e PV of all expected future dividends. Nonconstant Growth: Nonconstant Growth: Example 1 Compute the dividends until growth levels off D1 = 1(1.2) = $1.20 D = 1.20(1.15) = $1.38 2 D = 1.38(1.05) = $1.449 3 Find the expected future price P2 = D3 / (Ks – g) = 1.449 / (.2 ­ .05) = 9.66 Find the present value of the expected future cash flows P0 = 1.20 / (1.2) + (1.38 + 9.66) / (1.2)2 = 8.67 Example 2: Do= 2.00 and Ks= 13% Example 2: What if g = 30% for 3 years before achieving long­run growth of 6%? 0 k = 13% 1 s g = 30% D0 = 2.00 2 g = 30% 2.600 3 g = 30% 3.380 4 ... g = 6% 4.394 4.658 2.301 2.647 3.045 46.114 54.107 ^ = P0 $ P3 = 4.658 0.13 − 0.06 = $66.54 Example 3: What if g = 0% for 3 years Example 3: before long­run growth of 6%? 0 k = 13% 1 s g = 0% D0 = 2.00 2 g = 0% 2.00 3 g = 0% 2.00 4 ... g = 6% 2.00 2.12 1.77 1.57 1.39 20.99 25.72 ^ = P0 $ P3 = 2.12 0.13 − 0.06 = $30.29 Preferred stock Preferred stock Hybrid security Like bonds, preferred stockholders receive a fixed dividend that must be paid before dividends are paid to common stockholders. However,companies can omit preferred dividend payments without fear of pushing the firm into bankruptcy. Preferred stock generally does not carry voting rights If preferred stock with an annual dividend If preferred stock with an annual dividend of $5 sells for $50, what is the preferred stock’s expected return? Vp = D / kp $50 = $5 /...
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