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Week 4 Critical Thinking

Maylene Christopher

FIN500

Dr. Roman

May 4, 2015

WEEK 4 CRITICAL THINKING

Question 1: What is the value of the preferred stock when the dividend rate is 14% on a $100 par value? Thee appropriate discount rate for a stock of this risk level is 12%.

Value= D/r_ps

Value=.14x100/.12

Value= $116.67

Question 2: Pioneer preferred stock is selling for $33 per share in the market and pays a $3.60 annual dividend.

• What is the expected rate of return on the stock?

Value= D/r_ps

$.6/r_ps

R_ps= 3.6/33

R_ps= .109 or 10.9%

If an investors required rate of return is 10% what is the value of the stock for that investor?Should the investor acquire the stock?

Yes, he will earn more than what the stock is valued at.

Question 3: Calculate the value of a preferred stock that pays a dividend of $6 per share if your required rate of return is 12%.

Value= D/r_ps

V= 6/(.12)

V= $50

Question 4: The Fisayo Corp. wants to achieve a steady 7% growth rate. If it can achieve a 12% return on equity, what percentage of earnings must Fisayo retain for investment purposes?

Growth= ROE x Percentage Profit Earned

.07 = .12 x PPE

.58= PPE or 58% Precentage Profit Earned

Question 5: Dalton Inc. has an 11.5% ROE and retains 55% of its earnings for reinvestment purposes. It recently paid a dividend of $3.25 and the stock is currently selling for $40.

What is the growth rate for Dalton Inc.?What is the expected return for Daltons stock?If you require a 13% return, should you invest in the firm?If NCPs current market price is $23.50 per share, what is the stocks expected ROR?If your ROR is 10.5% what is the value of the stock for you?Should you make the investment?

Question 12: You are planning to purchase 100 shares of preferred stock and must choose between Stock A and Stock B. Stock A pays an annual dividend of $4.50 and is currently selling for $35. Stock B pays an annual dividend of $4.25 and is selling for $36. If your ROR is 12%, which stock should you choose?

Stock A: Value= 4.50/.12

Value= $37.50

StockB: Value= 4.25/.12

Value= $35.42

Choose Stock ____

Question 13: Solitron preferred stock is selling for $42.16 per share and pays $1.95 in dividends. What is your expected ROR if you purchase the security at the market price?

Expected Return= Dividend/Stock Price

Expected Return = 1.95/42.16

Expected Return = 0.046 or 4.6%

Question 14: You own 200 shares of Somner Resources preferred which currently sells for $40 per share and pays annual dividends of $3.40 per share.

What is your expected return?If you require a 17% return, should you purchase the stock?What is your expected rate of return if you buy the stock for $22.50?If you require a 17% return, should you purchase the stocks?

Yes, purchase the stock. The expected rate of return is greater than 17%.

Question 16: The common stock of Zaldi Co. is selling for $32.84 per share. The stock recently paid dividends of $2.94 per share and has a projected constant growth rate of 9.5%. If you purchase the stock at the market price what is your expected ROR?

Expected ROR = Dividend/Market Price + Growth Rate

Expected ROR = 2.94/32.84 + .095

Expected ROR = 0.185 or 18.5%

Question 17: The market price for Hobart common stock is $43 per share. The price at the end of year 1 is expected to be $48 and dividends for next year should be $2.84. What is the expected ROR?

Expected ROR= Dividend/Stock Price + Growth Rate

How would I find the growth rate?

Growth Rate = Return on Equity x Percentage of Profits Retained