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Peachtree Securities,
Inc. (B-2)
Preferred Stock
A class of ownership in a corporation that has a higher claim on its assets
and earnings than common stock.
Shares do not usually carry voting rights
Dividends are paid to preferred stock before dividends are paid to common
stock
Combines features on debt
= 1.09308 1
= 0.09308 or 9.31%
Given:
D1 = $1.80
g = 6%
t = 5 yrs (1992-1997)
Given:
D1 = $1.80
g = 6%
t = 5 yrs (1992-1997)
Growth
rate, g
Stock
Price, Pt
0
1
2
3
4
5
6.00%
6.00%
6.00%
6.00%
6.00%
6.00%
$ 21.00
$ 22.26
$ 23.60
$ 25.01
$ 26.51
$ 28.10
Dividend, Dividend
Dt
Yield
$
$
$
$
$
$
1.70
1.80
1.91
2.02
2.14
2.27
8.09%
8.09%
8.09%
8.09%
8.09%
8.09%
Capital
Gains
Yield
6.00%
6.00%
6.00%
6.00%
6.00%
6.00%
Dt
(P1-P0)
Notes:
Pt
P0
Dividend yield and capital gains yield are directly
correlated
and remains constant under the constant growth
assumptions.
= Previous stock = Previous div
price * (1+g)
amount * (1+g)
Earnings growth results from a number of factors including (1) inflation, (2) the
amount of earnings the company retains and reinvests and the (3) rate of return the
company earns on its equity (ROE). Inflation might vary during different periods,
regulations and economic policies might affect the direction and profitability of
businesses and organizational strategy and corporate events might affect investors
perception of the company affecting its price value. The Gordon Constant growth
model is effective for companies with mature and stable history of growth.
Given:
g (yr 1-5) = 6% t = 10
g (6 onwards) = 7.5%
The value of
share became
$19.76 which
is lower than
the $28.56
provided in A.
Given:
D1 = $1.80;
Dqi = $0.45
k = 13.5%
g = 6%
Quarte
r
1
2
3
4
Divq
$
$
0.45
0.75
$
$
0.45
0.50
$
$
0.45
0.25
$
$
0.45
Total Annual
CF
k-g
=
PVs
Dqi(1+k)i
13.50%
$ 0.4948
13.50%
$ 0.4794
13.50%
$ 0.4645
13.50%
$ 0.4500
$ 1.8887
13.5% - 6%
7.5%