Question

stock price? 11. Valuing Preferred Stock. E-Eyes.com has a new issue of preferred stock it calle 20/20 preferred. The stock will pay a $20 dividend per year, but the first dividend will not be paid until 20 years from today. If you require a return of 8 percent on this stock, how much should you pay today? 12. Stock Valuation. Alexander Corp. will pay a dividend of $2.72 next year. The company has stated that it will maintain a constant growth rate of 4.5 percent a year forever. If you want a return of 12 percent, how much will you pay for the stock? What if you want a return of 8 percent? What does this tell you about the relationship between the required return and the stock price? L03

Answer 1

11.first let us know the price at the end of year 20 =>dividend / required return

=>$20/0.08

=>$250.

current price = price after 20 years * 1 /(1+r)^n

here,

r =8%=>0.08

n=20.

=>250*1/(1.08)^20.

=>$53.64.

12. current price = dividend next year / (required return - growth rate)

=>$2.72 / (0.12-0.045)

=>$36.27.

if required return is 8%

price = $2.72 / (0.08-0.045)

=>$77.71.

as the required return reduces the price increases, so there is an inverse relation between price and required return.