A firm has preferred stock outstanding that has a dividend rate of 7%, and a face value of $50. This preferred stock does not have a maturity date.  If the stock is selling for $42.15, find the required return on the company’s preferred stock. (8.3%)

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  1. A firm has preferred stock outstanding that has a dividend rate of 7%, and a face value of $50. This preferred stock does not have a maturity date.  If the stock is selling for $42.15, find the required return on the company’s preferred stock. (8.3%)
  2. A firm has 8% coupon bonds outstanding that have 12 years left until maturity. The bonds are currently selling for $1078.54.  Find the yield to maturity on the firm’s bonds. (7.01%)
  3. Based on the answers to questions 5, 6 and 7, estimate the firm’s cost of capital. Assume that the firm finances itself with 50% debt, 45% common equity, and 5% preferred equity, and that the firm faces a marginal tax rate of 40%. (7.43%)
  4. Emory Corp. stock is selling for $120.00 per share. It is expected that Emory’s per-share dividends will grow at the rate of 3.50% for the foreseeable future.  The company just paid out a dividend of $4.75 per share.  What is the implied required rate of return on Emory stock?
  5. Tilson Inc. just paid out a per-share dividend of $2.00. These dividends are expected to increase at a very low rate of 2.00% for the coming 5 years.  After that, analysts project that per-share dividends will rise at a high rate of 12% for 5 years, and then increase steadily at a 3.00% rate for the foreseeable future after that.  Investors require a return of 10% on this stock.  Estimate what each share of Tilson stock should be selling for today.
  6. You observe that Lambert Corp.’s per-share dividends have risen from $2.10 five years ago to $2.80 today. You estimate that the company’s dividends will continue growing at that same percentage rate of growth for the foreseeable future.  Lambert’s long-term bonds are yielding 4.50% today, and you estimate that investors consider a premium of 3.50% over this rate as a fair return on the Lambert common stock.  Estimate what each share of Lambert’s stock should be trading for today.
  7. Pittman Industries stock is expected to pay out a per-share dividend of $5.25 a year from today. Analysts also expect that the company’s earnings and dividends are in steady state growth, with per-share dividends expected to grow at a rate of 4% for the foreseeable future.  Each share of Pittman stock is currently selling for $88.  Investors require a return of 9% on this stock.  Based on this, would you say that Pittman stock is underpriced, or would you say it is overpriced?  Or is it priced correctly?