Purchase Solution

# Finance: Ezzell preferred stock, Bahnsen common stock, Levine Co dividends

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Financial accounting calculations for Ezzell, Bahnsen and Levine Company. The problems all relate to stock and dividends issues concerning valuation, present value, rate of return. The answers are given in the attachments. The solution must provide all the detail calculations to arrive at the answers.

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The solution clearly shows all the formulas needed to compute the answers to the problems. The solutions are given.

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8-18 (a)
Dividend on a preferred stock = Interest % * Par Value = 10%*\$100 = \$10
Yield on identical preferred stock = 8%

Thus the perpetuity stream can be represented by the equation,
PV = 10/1.08 + 10/1.082 + 10/1.083 + ...

To this equation, we can apply the formula for the present value of perpetuity: C/r where C = 10 and r = 0.08. Thus the value of the equation is 10/0.08 = \$125.

Note: The formula C/(r-g) is used to determine the present value of a growing perpetuity. When g = 0 as in this case, the formula reduces to C/r.

8-18 (b)
If interest rates ...

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