Problem 1. Helen's Pottery Co.'s stock recently paid a $1.50 dividend (D0 = $1.50). This dividend is expected to grow by 15% for the next 3 years, and then grow forever at a constant rate, g. The current stock price is $40.92. If ks (required rate of return) = 10%, at what constant rate is the stock expected to grow following Year 3?
Problem 2. Hanebury Manufacturing Company (HMC) has preferred stock outstanding with a par value of $50. The stock pays a quarterly dividend of $1.25 and has a current price of $71.43. What is the effective rate of return on the preferred stock?
Problem 3. Assume that as investment manger of Maine Electric Company's pension plan (which is exempt from income taxes), you must choose between Exxon Mobil bonds and GM preferred stock. The bonds have a $1,000 par value; they mature in 20 years; they pay $35 each 6 months; they are callable at Exxon Mobil's option at a price of $1,150 after 5 years (ten 6-month periods); and they sell at a price of $815.98 per bond. The preferred stock is a perpetuity; it pays a dividend of $1.50 each quarter, and it sells for $75 per share. Assume interest rates do not change. What is the most likely effective annual rate of return (EAR) on the higher yielding security?