5. X-Tech Company issued preferred stock many years ago. It carries a fixed divi- dend of $5.00 per share. With the passage of time, yields have soared from the original 5 percent to 12 percent (yield is the same as required rate of return). What was the original issue price? b. What is the current value of this preferred stock? C. If the yield on the Standard & Poor's Preferred Stock Index deelines, how will the price of the preferred stock be affected?
Dividend Valuation
Dividend refers to a reward or cash that a company gives to its shareholders out of the profits. Dividends can be issued in various forms such as cash payment, stocks, or in any other form as per the company norms. It is usually a part of the profit that the company shares with its shareholders.
Dividend Discount Model
Dividend payments are generally paid to investors or shareholders of a company when the company earns profit for the year, thus representing growth. The dividend discount model is an important method used to forecast the price of a company’s stock. It is based on the computation methodology that the present value of all its future dividends is equivalent to the value of the company.
Capital Gains Yield
It may be referred to as the earnings generated on an investment over a particular period of time. It is generally expressed as a percentage and includes some dividends or interest earned by holding a particular security. Cases, where it is higher normally, indicate the higher income and lower risk. It is mostly computed on an annual basis and is different from the total return on investment. In case it becomes too high, indicates that either the stock prices are going down or the company is paying higher dividends.
Stock Valuation
In simple words, stock valuation is a tool to calculate the current price, or value, of a company. It is used to not only calculate the value of the company but help an investor decide if they want to buy, sell or hold a company's stocks.
25. X-Tech Company issued
26. Grant Hillside Homes, Inc., has preferred stock outstanding that pays an annual dividend of $9.80. Its price is $110. What is the required rate of return (yield) on the preferred stock? (All of the following problems pertain to the common stock section of the chapter.
27. Stagnant Iron and Steel currently pays a $4.20 annual cash dividend (D,). It plans to maintain the dividend at this level for the foreseeable future as no future growth is anticipated. If the required rate of return by common stockholders (K) is 12 percent, what is the price of the common stock
29. Ecology Labs, Inc., will pay a dividend of $3 per share in the next 12 months (D). The required rate of return (K.) is 10 percent and the constant growth rate is 5 percent. a. Compute Po- (For parts b, e, d in this problem, all variables remain the same except the one specifically changed. Each question is independent of the others.) Assume Ke, the required rate of return, goes up to 12 percent; what will be the new value of P? b. C. Assume the growth rate (g) goes up to 7 percent; what will be the new value of Po? K. goes back to its original value of 10 percent. d. Assume D, is $3.50; what will be the new value of Po? Assume K, is at its original value of 10 percent and g goes back to its original value of 5 percent
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