Question

Marcella Jusgettinbi has worked for a number of years at her current job. She is a packer t the Big Flavor Orange Juice Company im Ormond Beach, Florida. Recently, she received a letter from Art Finkel, attorney handling the estate of her late aunt, Betsy Murdock. Marcella was bequested 400 shares of preferred stock of the June Bride Wedding Dresses, Inc., company. These stock currently sell for $80 per share and pay annual dividends of $5.80 per share. Required 1. What is Marcella's expected rate of return? 2 Marcella would like to earn a minimum of 8% annually on this investment. Given the current price, would you advise Marcella to sell the stock, buy more stock, or just hold on to what she has received from the estate? 3. Marcella is also considering buying a sporty new convertible, which costs $25,000. If she were to sell the stock at $70 per share to her friend, Helen helpalott, would she have enough cash to buy the car?

Stock Problem

Answer 1

The formula for preferred stock is:

Price = Dividend/Rate

Rate = Dividend/Price

1) Dividend = $5.80

Price = $80

Rate= 5.80/80= 0.0725 or 7.25%

2) Since the required return of 8% is more than 7.25%, Marcella shall sell the stocks and buy another stock which offers a higher rate.

3) At $70 per stock, 400 stock shall sell for:

$70*400= $28,000

Hence she would be able to buy convertible as proceeds from sale are higher than $25,000.