Question

Musical Memories, Inc. has 230,000 shares of common stock outstanding as a market price of $14 per share. The historical dividends (per share) for the firm were as follows:

2007: $1.10

2008: $1.10

2009: $1.12

2010: $1.15

2011: $1.17

2012: $1.20

Musical Memories also has 8,000 bonds outstanding that are currently selling for 102 percent of face value. The bonds carry an 8.5% coupon rate and mature in 5 years. There are also 51,000 shares of preferred stock outstanding currently selling for $38 per share with an annual dividend of $2.25, perpetually. The firm’s marginal tax rate is 35%.

15.

What is your best estimate for the average growth rate in dividends paid to common stockholders?

a. 1.67% b. 1.76% c. 2.12% d. 1.54% e. 2.20%

Answer 1

Best estimate for the average growth rate:

= ($1.20/$1.10)^(1/5)-1

= 1.090909^(1/5)-1

= 1.0176-1

= 1.76%

Hence, correct option is b. 1.76%