Question

Kwak Motors preferred stock pays an annual dividend of $3.50 per share. If the stock is selling for $50 per share, what would be the annual rate of return earned of Kwak Motors preferred stock?

A) 1.43% B) 4.35% C) 7.00% D) 14.29%

you expect that three years from today, periwinkle corporation will begin paying its first ever dividends of $4.00 a share, an amount that will be held constant. if you require a rate of return of 10%. what is the most that you should be willing to pay for a share of stock?

A) $35.05 B) $33.06 C) $37.68 D) $40.00

Answer 1

Calculate the annual rate earned as follows: Dividend Annual rate of return = Stock price $3.50 $50 = 7% Therefore, the annual rate of return earned on the given stock is 7% or option C. It is given that the first dividend will be paid 3 years from now, or at the end of year 3. Calculate its present value as at the end of year 2 using the formula to calculate the present value of a perpetuity as follows: Dividend Price at the end of year 2 = Required return $4 10% = $40 Now, calculate the present value of this amount as of today as follows: Future value Present value = - (1+interest rate) * $40 (1+10%) = $33.06 Therefore, the price of the stock today should be $33.06 or option B).