Question

(b) (5 pts) UIC Inc. has an issue of preferred stock outstanding that pays a $5 dividend every year, in perpetuity. If the market requires a return of 10% on assets this risk level, how much should the preferred stock be selling for? (c)(8 pts) A common stock just paid a dividend of $2. The dividend is expected to grow at 6% for 5 years, then it will grow at 2% in perpetuity. What is the stock worth? The discount rate is 10%. 2.(12 pts) You are saving for college education for your two children. One child will start college 10 years from today and the other will start 15 years from today. You estimate their college expenses to be $50,000 per year for 4 years per child, payable at the beginning of each school year. You currently have $10,000 saved. How much money do you need to save each year to fund your children's education? Your deposits will start ne year from today and you will make the last deposit when the younger child enters college. The interest rate is 10%.

Answer 1

b)

Preferred stock price Annual dividend-Required rate Here, Annual dividend Required rate $ 10% Preferred stock price 50.00 5:10%

c)

B7 : X fx =+B6*1.02 A B co PVIF @10% Present value 2 D1 $ 2.12 0.909 $ 1.93 3 D2 $ 2.25 0.826 $ 1.86 4 D3 2.38 0.751 $ 1.79 5 D4 2.52 0.683 $ 1.72 6 D5 2.68 0.621 $ 1.66 7 DO 2.73 8 Horizon value $ 34.12 0.621 $ 21.19 9 2.73/(10%-2%) 10 Value of common stock $ 30.15

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