Compute and answer the following questions, showing your calculations for how you got the answer. Note that your calculations should be in 4 decimal places and the final response in percentages (for example, 0.1167 should be reported as 11.67%):
- A share of preferred stock pays a quarterly dividend of $2.50. If the price of this preferred stock is currently $50, what is the simple annual rate of return?
- Eastern Auto Parts’ last dividend was D0 = $0.50 and the company expects to experience 5 percent constant growth for the future. Eastern has a required rate of return of 12 percent. What should be the present price per share of Eastern common stock?
- A share of perpetual preferred stock pays an annual dividend of $10 per share. If investors require a 14 percent rate of return, what should be the price of this preferred stock? (Hint: Preferred stock is a special case of the Dividend Discount Model (DDM) for which the dividend growth, g, is zero.)
- A share of preferred stock pays a dividend of $0.50 each quarter. If you are willing to pay $20.00 for this preferred stock, what is your simple (not effective) annual rate of return?
- Auto Parts’ last dividend was D0 = $1.90, and the company expects 7% growth for the foreseeable future at $20.83 current price. What should be the company’s required rate of return for this common stock?