World Wide Interlink Corp. has decided to undertake a large project. Consequently, there is a need for additional funds. The financial manager plans to issue preferred stock with an annual dividend of $5 per share. The stock will have a par value of $30. If investors' required rate of return on this investment is currently 20%, what should the preferred stock's market value be?
We have: Annual dividend = $5 Required return = 20% The value of a preferred stock is the current value of its future dividends. Since the dividends are in the form of a perpetuity, we have following formula for the value of a preferred stock: Price = Dividend / required return = $5 / 0.20 = $25 Therefore, the market value of the preferred stock would be $25 .
ABC, Inc. just paid a dividend of $2. ABC expects dividends to grow at 10%. The return on stocks like ABC, Inc. is typically around 12%. What is the most you would pay for a share of ABC stock?
We have: Do = $2 g= 10% R= 12% We can use dividend discount model to compute the price of the stock: Price = Do x (1+g)/ (R-g) = 2 x (1+0.10)/ (0.12-0.10) = 2.2/ 0.02 =$ 110 Therefore, price for the stock would be $110.
Assume the total cost of a college education will be $410,000 when your child enters college in 15 years. You presently have $68,000 to invest. Required: What annual rate of interest must you earn on your investment to cover the cost of your child’s college education?
We have: FV= 410,000 N =15 PV= 68,000 We can use following formula to compute the rate of interest: (1+R)^n = FV/ PV (1+R)^15 = 410,000 / 68,000 (1+R)^15 = 6.029412 R = 1.127245-1 R= 12.72% So the required interest rate would be 12.72%.