Johnson has to decide whether to purchase a preference share which redeemable or one which is not.
The redeemable share is $1000 per value share which promises 15% dividend annually with a call price of 975 in (six)6years time whereas the non redeemable share of the same par value pays 18% dividend the redeemable and non redeemable have market value of $990 and $1025 respectively.
Assume the investors required rate of return to16%
a.which share should Johnson purchase and why?
b.Purity incorporated has a share which pays a dividend of $4.5 to shareholder last year.It is expected dividend will increase at a rate of 4% for the first year.
8% for the next four(4) years and pick at 6% forever the required rate of return 9.5%
What is the value of the share today?
Thanks