Question 3 (10 marks)

ABC Ltd. is expected to increase its dividends by 10% for the next 2 years. After that, the dividends will grow at a rate of 5% per year, indefinitely. The last dividend just paid was $1.20 and the investors required rate of return on this stock is 12%.

1. What are the dividends amount of D₀, D₁, D₂, and D₃? Show your calculations.

(2 marks)

2. What is the price of the ABC stock one year from now? Show your calculations.

(4 marks)

3. Briefly describe FOUR distinctive characteristics of preferred stock.