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castortr0y [4]
3 years ago
8

E-Eyes just issued some new preferred stock. The issue will pay an annual dividend of $15 in perpetuity, beginning 20 years from

now. If the market requires a return of 4.5 percent on this investment, how much does a share of preferred stock cost today
Business
1 answer:
IgorLugansk [536]3 years ago
7 0

Answer:

The price of the stock today is $144.43.

Explanation:

The price of the preferred stock today can be calculated by using the zero growth model of the DDM. The zero growth model values the stock based on its constant dividend and required rate of return. As the stock will pay its first dividend 20 years from now, we will calculate the stock price at t = 19 and discount it back to today's value.

The price formula under zero growth model is,

P = D / r

P19 = 15 / 0.045

P 19 = $333.3333333

The price of the stock today is,

P0 = 333.3333333 / (1+0.045)^19

P0 = $144.43

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c. If Price is reduced then Earning per share will also decrease.

Explanation:

a. The computation of Growth rate is shown below:-

Share price = Expected dividend ÷ (Cost of equity - Dividend growth rate)

$80 = $4 ÷ (0.14 - Dividend growth rate)

11.20 - 80 × Dividend growth rate = 4

Dividend growth rate = 9%

b-1 The computation of Price is shown below:-

= Expected dividend ÷ (Cost of equity - Revised downward percentage)

= 4 ÷ (0.14 - 0.04)

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= $40

b-2 If Price is reduced then Earning per share will also decrease.

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4 years ago
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Explanation:

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Collectivism can be defined as an economical, political or cultural system in which communities (group of people) are generally valued over individuals.

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