Question 1
E-Eyes.com has a new issue of preferred stock it calls 20/20 preferred. The stock will pay a $20 dividend per year, but the first dividend will not be paid until 20 years from today. If you require a return of 10.75 percent on this stock, how much should you pay today? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
Question 2
E Eyes.com has a new issue of preferred stock it calls 20/20 preferred. The stock will pay a $20 dividend per year, but the first dividend will not be paid until 20 years from today. If you require a 10.50 percent return on this stock, how much should you pay today? Round to 2 decimals.
Question 3
E-Eyes.com has a new issue of preferred stock it calls 20/20 preferred. The stock will pay a $20 dividend per year, but the first dividend will not be paid until 20 years from today. Required: If you require a return of 8.50 percent on this stock, how much should you pay today? (Do not round intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).)
Answer to question 1
stock price 20 years from now = 20/0.1075 = 186.05
price now = 186.05/(1+10.75%)^20
= 24.14
Answer to question 2
Answer to question 3
Price of stock 19 years from now = 20/8.5% = 235.29
Price of stock today = price of stock 19 years from now/ (1.085)^19 = 49.93
answer 2:
Here, we have a stock that pays no dividends for 20 years. Once the stock begins paying dividends, it will have the same dividends forever, a preferred stock equation. It is important to remember that the price we find will be the price one year before the first dividend,
so:
P19=D20/R
P19=$20/0.07
P19=$235.29
The price of the stock today is simply the present value of the stock price in the future.We simply discount the future stock price at the required return . The price of the stock today will be :
P0=235.29/1.085^19
P0=$49.94