Valuing Common & Preferred Stock

Chapter

Eight

Problem Set – Common & Preferred Stock

1. Company ZZZ has issued a preferred share with a face value of $25.00 with a dividend of 5%. If investors require a 6% return to hold ZZZ preferred stock, what price would the stock trade at in the market? ($20.83)

2. Company XXX has also issued preferred shares, but they have a face value of $50 and a dividend of $2.50. If investors require a yield of 7% to hold XXX preferreds, what price will they trade at in the market? (35.71)

3. You own 100 preferred shares of SouthernAir Inc. The shares are trading in the market at $40 and they pay a dividend of $2 every year. What yield are you earning on your SouthernAir shares? (5%)

4. Country Crock Inc. just issued common shares at $25 per share. They are expected to pay a dividend of $1.00 at the end of the year and then grow at 6% per year thereafter. If investors require a return of 10% to hold Country Crock stock, how much would you pay for a share? ($25)

Problem Set – Common & Preferred Stock

5. Western Linens paid a dividend of $1.25 per common share yesterday. The dividend is expected to grow at 4% per year. Investors require a return of 12% to hold the stock. How much should a share of common stock cost in the market? ($16.25)

6. EasyJet Corp is a fast growing commuter jet firm. It is expected to pay a dividend of $1.00 tomorrow. The dividend is expected to grow at 30% for two years, then at 15% for two years and then 5% thereafter. If investors require a 10% return to hold EasyJet stock, how much should a share cost today? ($37.62)

7. Globaltech Financial has also been growing quickly but it has elected to plow all earnings back into future growth. It is not expected to pay a dividend for five years. It is then expected to pay a dividend of $1.00 per share at time period 6, which will then grow at 4% per year thereafter. Investors require a return of 10% to hold the stock. What is each share worth? (10.35)

Problem Set – Common & Preferred Stock

• The XYZ Company is not expected to pay a dividend for the next three years. At the end of year three, the company expects to pay a dividend of $1.00. This is then expected to grow at 20% per year for two years. After this, the growth rate is expected to settle down to 4% thereafter. Investors require a return of 14% to hold XYZ stock. What do we expect for a market price? ($9.92)