Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

I sent 5 questions 3 days ago but nobody replied them so please solve it this question now because i have quiz Your cousin is

I sent 5 questions 3 days ago but nobody replied them so please solve it this question now because i have quiz

Your cousin is thinking about investing in some stocks but she cannot decide on which stocks to invest in. She knows that you are taking Principles of Finance this semester thus she asks your opinion. Monsters Inc. also has two different kinds of stock in the market: preferred stock and common stock. Preferred stock: Pays $1 every quarter and the required rate of return on this stock is 10% per year with quarterly compounding. Common stock: Has just distributed $1.2 and analysts think that for the next 2 years, the dividends of the company will grow at 50% per year and then for another two years they will grow at 25% per year. After 4 years of supernormal growth, it is expected that the growth rate of dividends will stabilize at 5% per year and will stay at that level forever. The analysts also forecast that the required rate of return on common stock of the company will be 14% for the next three years due to high risk but it will decrease to 12% after three years and will stay at that level forever. a. Calculate the price of the preferred stock today. b. Calculate the price of the common stock today. c. If the preferred stock sells for $42 per share and the common stock sells for $45 per share in the market today, determine which one(s) of these stocks your cousin should invest in and state why. d. Assuming one year passed, calculate the price of common stock at t=1. e. Given the price you calculated in part d, calculate the dividend yield, capital gains yield, and total return on the common stock of the company.

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image_2

Step: 3

blur-text-image_3

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Foundations Of Financial Markets And Institutions

Authors: Frank J. Fabozzi, Franco Modigliani, Michael G. Ferri

2nd Edition

0136860567, 9780136860563

More Books

Students also viewed these Finance questions