Question

3 Problem 1 A: Calculate the price of the following Preferred Stocks: 4 Show Calculation (10% of Total grade) 5 Stock 1 Stock 2 Stock 3 Stock 4 Stock 5 7 Par Value 8 Dividend Rate 9 Discount Rate $100.00 6.00% 10.00% $50.00 8.00% 5.00% $75.00 10.00% 7.50% $60.00 9.00% 8.00% $100,00 5.00% 2.50% 12 Answer 16 Problem 1 B: Calculate the price of the following Common Stocks Using the Dividend Growth Model: 17 Show Calculation (20 % of Total Grade) 19 Stock 1 Stock 2 Stock 3 Stock 4 Stock 5 $1,250,000.00 $6,500,000.00 $7,500,000.00 $4.00 50.00% 14.00% 21 Net Income $1,000,000.00! 22 Common Stock $4,500,000.00 23 Retained Earnings $4,500,000.00 24 Dividend Current Year $3.50 25 Profit Retnetion Rate 75.00% 26 Required Rate of Return 15.00% 27 Dividend Growth = Growth Rate Caculated Below 28 29 Dividend Growth Rate = 30 Caloulated Growth Rate 31 32 $3,000,000.00 $17,500,000.00 $15,000,000.00 $2.50 45.00% 13.50% $1,500,000.00 $10,500,000.00 $4,500,000.00 $1.75 60.00% 16.00% $4,000,000.00 $20,500,000.00 $17,500,000.00 $4.75 25.00% 14.50%

Answer 1

a)

	1	2	3	4	5
Par Value	100	50	75	60	100
Dividend Rate	6.0%	8.0%	10.0%	9.0%	5.0%
Discount Rate	10.0%	5.0%	7.5%	8.0%	2.5%
Answer	60	80	100	67.5	200

Formula : Dividend/ Discount Rate

B)  

	1	2	3	4	5
Net Income	10,00,000.00	12,50,000.00	30,00,000.00	15,00,000.00	40,00,000.00
Common Stock	45,00,000.00	65,00,000.00	1,75,00,000.00	1,05,00,000.00	2,05,00,000.00
RE	45,00,000.00	75,00,000.00	1,50,00,000.00	45,00,000.00	1,75,00,000.00
Dividend	3.50	4.00	2.50	1.75	4.75
Profit Retention	75.0%	50.0%	45.0%	60.0%	25.0%
Required Return	15%	14%	14%	16%	15%
Dividend Growth	11%	7%	6%	10%	4%
Price of Shares	103.83	61.14	35.72	29.97	45.26

Dividend Growth= Profit Retention* Required Return

Price of Share = Dividend *(1+ Dividend Growth) / (Required return - Dividend Growth)

Effectively, for both the scenarios what we are actually doing is discounting the future dividends and bringing it to present value. That present value is the price of the asset.