# Word problems relating to dividends and Preferred Stock

Problem #1

Present Value: Jack Hammer invests in a stock that will pay dividends of $2.00 at the end of the first year; $2.20 at the end of the second year; and $2.40 at the end of the third year. Also, he believes that at the end of the third year he will be able to sell the stock for $33. What is the present value of all future benefits if a discount rate of 11 percent is applied? (Round all values to two places to the right of the decimal point.)

Problem #2

North Pole Cruise Lines issued preferred stock many years ago. It carries a fixed dividend of $6 per share. With the passage of time, yields have soared from the original 6 percent to 14 percent (yield is the same as required rate of return).

a. What was the original issue price?

b. What is the current value of this preferred stock?

c. If the yield on the Standard & Poor's preferred Stock Index declines, how will the price of the preferred stock be affected?

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#### Solution Preview

Problem # 1

The present value of future benefits are obtained by dividing the cash flows by the present value factor. The present value factor is given as (1+r)^n, where r is the discount rate and n is the time period. In this problems, the cash flows are given as

Year 1 2.00

Year 2 2.20

Year 3 2.40

Year 3 33

Since the stock is sold in year 3, that is also a cash flow in ...

#### Solution Summary

The solution has 2 problems relating to Jack Hammer (dividends) and North Pole Cruise Lines (preferred stock)