Valuing Common & Preferred
Stock
Chapter
Eight
Problem Set – Common &
Preferred Stock
1. Company ZZZ has issued a preferred share with a face value of
$25.00 with a dividend of 5%. If investors require a 6% return to
hold ZZZ preferred stock, what price would the stock trade at in the
market? ($20.83)
2. Company XXX has also issued preferred shares, but they have a
face value of $50 and a dividend of $2.50. If investors require a
yield of 7% to hold XXX preferreds, what price will they trade at in
the market? (35.71)
3. You own 100 preferred shares of SouthernAir Inc. The shares are
trading in the market at $40 and they pay a dividend of $2 every
year. What yield are you earning on your SouthernAir shares?
(5%)
4. Country Crock Inc. just issued common shares at $25 per share.
They are expected to pay a dividend of $1.00 at the end of the year
and then grow at 6% per year thereafter. If investors require a
return of 10% to hold Country Crock stock, how much would you
pay for a share? ($25)
Problem Set – Common &
Preferred Stock
5. Western Linens paid a dividend of $1.25 per common share
yesterday. The dividend is expected to grow at 4% per year.
Investors require a return of 12% to hold the stock. How much
should a share of common stock cost in the market? ($16.25)
6. EasyJet Corp is a fast growing commuter jet firm. It is expected to
pay a dividend of $1.00 tomorrow. The dividend is expected to
grow at 30% for two years, then at 15% for two years and then 5%
thereafter. If investors require a 10% return to hold EasyJet stock,
how much should a share cost today? ($37.62)
7. Globaltech Financial has also been growing quickly but it has
elected to plow all earnings back into future growth. It is not
expected to pay a dividend for five years. It is then expected to pay
a dividend of $1.00 per share at time period 6, which will then grow
at 4% per year thereafter. Investors require a return of 10% to hold
the stock. What is each share worth? (10.35)
Problem Set – Common &
Preferred Stock
• The XYZ Company is not expected to pay a dividend for
the next three years. At the end of year three, the
company expects to pay a dividend of $1.00. This is
then expected to grow at 20% per year for two years.
After this, the growth rate is expected to settle down to
4% thereafter. Investors require a return of 14% to hold
XYZ stock. What do we expect for a market price?
($9.92)