If the price of the preferred stock is $100, calculate the nominal rate of return. Review the formula. The calculation is "annual dividend (quarterly dividend * price)/ price" = $3*4)/$100 = $12 / $100 = .12 or 12 percent. The nominal rate of return is 12 percent.
Full Answer
What is the required rate of return on the stock Rs?
The required rate of return on the stock Rs, is 15%. What is the stocks current value per share? D1 = $0.50; g = 7%; rs = 15%; = ?
What is Silva's required rate of return on dividends?
The dividend is expected to grow by 100% during Year 1, by 50% during Year 2, and then at a constant rate of 5% thereafter. If Silva's required rate of return is rs = 12%, what is the value of the stock today? ... The value of a share of stock can be estimated by using the PV of future dividends.
What does the expected rate of return depend on?
The expected rate of return. The value of a share of common stock depends on the cash flows it is expected to provide, and those flows consist of two elements: (1) the dividends the investor receives each year while he or she holds the stock and (2) the price received when the stock is sold.
What is the preemptive right of current stockholders?
The preemptive right is the right of current stockholders to buy new shares in an amount that will maintain their proportionate ownership in the firm. True or false? Firms can use different classes of common stock to meet specific needs of the company.
What are the two elements that determine the value of a share of common stock?
The value of a share of common stock depends on the cash flows it is expected to provide, and those flows consist of two elements: (1) the dividends the investor receives each year while he or she holds the stock and (2) the price received when the stock is sold.
How to find the value of a share of stock?
The value of a share of stock can be estimated by using the PV of future dividends. An alternative valuation procedure, called the "corporate valuation model," calls for finding the expected future free cash flows, discounting those cash flows at the weighted average cost of capital, summing the PVs of the free cash flows, subtracting the market values of debt and preferred to calculate the value of the common equity, and then dividing by the number of shares outstanding to find the value of a share of common stock. In theory, the two methods should produce the same stock price. Is this statement true or false?
What is the difference between a discounted dividend and a valuation model?
a. The only difference between the discounted dividend and corporate valuation models is the expected cash flow stream. Expected future dividends are the cash flow stream in the discounted dividend model and expected free cash flows are the cash flow stream in the corporate valuation model. Both models use the same discount rate to calculate the present value of the cash flow stream.
What is common stock?
Common stock represents the (a) position in a firm, and is valued as the present value of its expected future (b) stream. Common stock dividends (c.) specified by contract—they depend on the firm's earnings. Two models are used to estimate a stock's intrinsic value: the discounted dividend model and the corporate valuation model.
Which dividend model is especially suited for valuing companies that are privately held?
b. The discounted dividend model is especially suited for valuing companies that are privately held.
What is preemptive right?
The preemptive right is the right of current stockholders to buy new shares in an amount that will maintain their proportionate ownership in the firm. True or false?
What is terminal date?
The terminal, or horizon, date is the date when the growth rate becomes constant. This occurs at the end of Year 2.