Question

Quantitative Problem 1: Hubbard Industries just paid a common dividend, Do. of $1.40. It expects to grow at a constant rate of 3% per year. If Investors require a 12% return on equity, what is the current price of Hubbard's common stock? Round your answer to the nearest cent. Do not round Intermediate calculations. per share Zero Growth Stocks: The constant growth model is sufficiently general to handle the case of a zero growth stock, where the dividend is expected to remain constant over time, In this situation, the equation is: Bor! Note that this is the same equation developed in Chapter 5 to value a perpetuity, and it is the same equation used to value a perpetual preferred stock that entities its owners to regular, fixed dividend payments in perpetuity. The valuation equation is simply the current dividend divided by the required rate of return. Quantitative Problem 2: Carlyle Corporation has perpetual preferred stock outstanding that pays a constant annual dividend of $1.70 at the end of each year. If investors require an 10% return on the preferred stock, what is the price of the firm's perpetual preferred stock? Round your answer to the nearest cent. Do not round Intermediate calculations. per share

Answer 1

Solution to QUESTION-1

Here, we have Dividend per share in year 0 (D0) = $1.40 per share

Dividend Growth Rate (g) = 3.00% per year

Required Rate of Return (Ke) = 12.00%

As per Constant Growth Dividend Valuation Model, the Current Price of the common stock is calculated as follows

The Current Price of the common stock = D0(1 + g) / (Ke – g)

= $1.40(1 + 0.03) / (0.12 – 0.03)

= [$1.44 x 1.03] / 0.09

= $1.4420 / 0.09

= $16.02

Solution to QUESTION-2

Price of the firm’s preferred stock

Here, we’ve the annual Dividend per share = $1.70 per share

Required rate of return = 10.00%

Therefore, the Price of the firm’s preferred stock = Annual Preferred Dividend / Required rate of return

= $1.70 / 0.10

= $17.00