Question 3 [25 marks]

From a financial point of view, what are the main differences between debt and equity? (10 marks)

H&M Inc. just paid $1.79 to its shareholders as the annual dividend. Simultaneously, the company announced that future dividends will be increasing by 3.2%. If you require a 10.5% rate of return, how much are you willing to pay to purchase one share of this stock? What is your estimate for the share price in three years? (7 marks)

The preferred stock of ABC Inc. pays an annual dividend of $6.50. What is the price of the preferred stock if the required return is 6%? If the required return is 8%? If the required return is 10%? What do you conclude about the relationship between the required return and the stock price? (8 marks)