Session 7 Questions
#1- You are planning to buy 100 shares preferred stock, either Stock A or Stock B. Stock A pays an annual dividend of $4.50 and has a market price of $35. Stock B pays an annual dividend of $4.25 and has a market price of $36. If your required rate of return is 12%, which stock should you buy? HINT: Calculate the appropriate metric and decide.
I would choose stock A as it has a lower selling price of $35.00, pays a higher dividend or $4.50 and the required rate of return is this same.
#2- You intend to buy Marigo common stock at $100 per share, hold it for one year, and sell it after receiving a cash dividend of $6. How much will the stock price have to appreciate for you to achieve a required rate of return of 11%?
D1 = 6, P0=100 (50), Ks = 11% (15%)
SO we have P0 = D1/(Ks-g)
or g = Ks – D1/P0 = 11% – 6/100 = 5%
So P1 = D1*(1+g)/(Ks-g) = 6*(1+5%)/(11%-5%) = $105.00
So Stock price should be $105.00 for giving a 11% return.
#3- You are considering three investments.
(You are NOT expected to do Excel calculations on this assignment. Therefore, the Excel results are shown below. Explain the inputs, output, and the interpretation of the output.)
Using the panel of Excel data on the next page and the Stocks Support Template 2015.xlsx that shows the formulas in the cells, answer these questions:
#4- Which is better, a $40 stock or a $4 stock? Explain very briefly.
#5- Show the equation/formula you would use to calculate the average annual rate of return on a stock you bought on January 27, 2002 for $100 and sold on January 27, 2012 for $150? Assume that dividend payout was zero.
#6- Construct a table to succinctly compare and contrast the building blocks of stock and bond valuation.
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