1) EMC has preferred stock outstanding which pays a dividend of $5.00 at the end of each year. This stock was issued in perpetuity and has no maturity date. EMC's preferred stock sells for $60 per share.

Calculate this preferred stock's required rate of return

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2) Flanigan Corporation has just paid an annual dividend of $1.50 per share (D0 = $1.50). The dividend is expected to grow 5% per year for the next 3 years, and then 10% a year thereafter.

Calculate Flanigan Corporation's expected dividend per share for each of the next 5 years.

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3) Pablo's Pizza International Inc.'s common stock currently sells for $20 per share. The stock has just paid an annual dividend of $1.00 (D0 = $1.00). The dividend is expected to grow at a constant rate of 10% per year.

a. Calculate the stock price expected 1 year from now.
b. Calculate the required rate of return on PPI's common stock.

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Solution Preview

1) EMC has preferred stock outstanding which pays a dividend of $5.00 at the end of each year. This stock was issued in perpetuity and has no maturity date. EMC's preferred stock sells for $60 per share.

Calculate this preferred stock's required rate of return

=Dividend/Stock Price
=5/60
8.33% =Answer

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