I: PREFERRED STOCK VALUATION
Fee Founders has perpetual preferred stock outstanding that sells for $60 a share and pays a dividend of $5 at the end of each year. What is the required rate of return?
II: PREFERRED STOCK VALUATION
Ezzell Corporation issued perpetual preferred stock with a 10% annual dividend. The stock currently yields 8%, and its par value is $100.
a. What is the stock's value?
b. Suppose interest rates rise and pull the preferred stock's yield up to 12%. What is its new market value?
III: VALUATION OF A DECLINING GROWTH STOCK
Martell Mining Company's ore reserves are being depleted, so its sales are falling. Also, because its pit is getting deeper each year, its costs are rising. As a result, the company's earnings and dividends are declining at the constant rate of 5% per year. If D0 = $ 5 and rs = 15%, what is the value of Martell Mining's stock?
IV: VALUATION OF A CONSTANT GROWTH STOCK
Investors require a 15% rate of return on Levine Company's stock ( that is, rs = 15%).
a. What is its value if the previous dividend was D0 = $2 and investors expect dividends to grow at a constant annual rate of (1) - 5%, (2) 0%, ( 3) 5%, or ( 4) 10%?
b. Using data from Part a, what would the Gordon ( constant growth) model value be if the required rate of return was 15% and the expected growth rate was ( 1) 15% or ( 2) 20%? Are these reasonable results?
c. Is it reasonable to think that a constant growth stock could have g > rs?