Problem

ADM Labs is a publicly owned company with several issues of capital stock outstanding. Ove...

ADM Labs is a publicly owned company with several issues of capital stock outstanding. Over the past decade. the company has consistently earned modest profits and has increased its com­mon stock dividend annually by 5 or 10 cents per share. Recently the company introduced several new products that you believe will cause future sales and profits to increase dramatically. You also expect a gradual increase in long-term interest rates from their present level of about 11 percent to. perhaps. 12 percent to 12 ¼ percent.

Instructions

Based on these forecasts, explain whether you would expect to see the market prices of the follow­ing issues of ADM capital stock increase or decrease. Explain your reasoning in each answer.

a. 10 percent. $100 par value preferred stock (currently selling at $90 per share).


b. $5 par value common stock (currently paying an annual dividend of $2.50 and selling at $40 per share).


c. 7 percent. $ 100 par value convertible preferred slock (currently selling at $ 125 per share).

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