Question: 22. The Fridge –Air Company’s preferred stock pays a dividend of $4.50 per share annually. If the required rate of return on comparable quality preferred stocks is 14 percent , calculate the value of Fridge Air’s preferred stock.
23. The Joseph Company has a stock issue that pays a fixed dividend of $3.00 per share annually. Investors believe the nominal risk- free rate is 4% and that this stock should have a risk premium of 6 %. What should be the value of this stock?
24. The Lo Company earned $2.60 per share and paid a dividend of $1.30 per share in the year just ended. Earnings and dividends per share are expected to grow at a rate of 5 percent per year in the future. Determine the value of the stock:
a) If required rate of return is 12%
b) If the required rate of return is 15%
c)Given your answers to (a) and (b), how are stock prices affected by changes in investor’s required rates of return.
Answer: the value of preferred stock = Annual dividend/ Return on preferred stock = $4.5/ 14% = $32.14286
Answer 23) Value of Stock= Risk Free Rate + Risk Premium= 4% + 6% = 10%. therefore value of stock = $3/10% = $30 Edit
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