Purchase Solution

# Semiannual Compounding; Equity Security; Discount Rate; Investor's RRR

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Use semiannual compounding on all bond problems unless otherwise indicated

1. Determine the fair price of a \$50 par preferred issue equity security (preferred stock) that pays a 3% dividend annually at a discount rate of 5%.

2. Calculate an investor's RRR if they buy an 8% \$40 par preferred stock that is for \$50.

3. What is the maximum price an investor with a required rate of return of 12% pay for a \$60 par preferred stock that pays an annual dividend of 6%.

4. What would the yield on a \$45 par 5% preferred stock be when the market is efficient?

5. Price a share of common stock using the dividend valuation model that paid a \$3 dividend last period, has a 6% growth rate when your RRR is 15%.

6. Calculate the investors' required rate of return on a common stock that paid a dividend of \$2 one period ago has a growth rate of 3%, and is currently trading at \$28.

7. How much would you be willing to pay for a share of common stock that will pay a dividend of \$5 this period and has a growth rate of 4% if your required rate of return on investments with similar risk is 9%?

8. You are considering investing in one of two common securities. You have determined that both securities carry similar degrees of risk. Security A has a current price of \$40, a growth rate of 4% and one period ago paid a dividend of \$4. Security B has a current price of \$42, a growth rate of 3.5% and a current dividend of \$3.75. Based on the securities returns alone which stock will you invest in?

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