1 If you are expecting dividend payments of 175 from your pr

1. If you are expecting dividend payments of $17.5 from your preferred stock, and if you require a 12% return from this investment, what is the fair value of your preferred stock?

$19.60

$15.63

cannot be determined

none

2. A company’s historical P/E ratio is 10. Its net income is $25 million and it has 500,000 shares of stock outstanding. The net profit is expected to grow by 3 percent annually. What is the expected price of this stock one year from now?

$51.50

$515

cannot be determined

none

ANSWER ALLLLLLLLLLLLLLLLLLLLL

	a.	$19.60
	b.	$15.63
	c.	cannot be determined
	d.	none

Solution

1) d.None Working: Fair Value of preferred stock = Dividend /Required return on investment = $ 17.5 / 12% = $ 145.83 2) b.$515 Working: a.Expected net income one year from now = 25*(1+0.03) = $          25.75 Million b.Earning per share = Net Income /Number of shares = $       2,57,50,000 /        5,00,000 = $ 51.50 c.Expected Price one year from now = Earning per share x P/E Ratio = $ 51.50 x 10 = $ 515