Question 3 (10 marks)

LogiTel Corp. is a public company which had issued both common stock and cumulative preferred stock. In its recent meeting, management has decided not to pay dividends in the next 3 years.

a) John, a shareholder of LogiTel, is unhappy with the managements decision and intends to sue the company for not paying dividends. Briefly comment on Johns intention.

b) Briefly explain the cumulative feature of preferred stock.

(2 marks)

(2 marks)

c) Assume that LogiTel will pay a dividend of $1 per share of common stock at the end of year 4. Dividends are expected to grow at 5% per year in year 5 and 6. After that, dividends will growth at a constant rate of 1% per year indefinitely. Calculate the current common stock price if the required return is 8%.

(6 marks)