>> Accounting Basics
1. The Fridge- Air Company's preferred stock pays a dividend of $ 4.50 per share annually. If the required rate of return on compara-ble quality preferred stocks is 14 percent, calculate the value of Fridge- Air's preferred stock.
2. The Joseph Company has a stock issue that pays a fixed dividend of $ 3.00 per share annually. Investors believe the nominal risk- free rate is 4 percent and that this stock should have a risk premium of 6 percent. What should be the value of this stock?
3. The Lo Company earned $ 2.60 per share and paid a dividend of $ 1.30 per share in the year just ended. Earnings and dividends per share are expected to grow at a rate of 5 percent per year in the future. Determine the value of the stock:
a. if the required rate of return is 12 percent.
b. if the required rate of return is 15 percent.
c. Given your answers to ( a) and ( b), how are stock prices affected by changes in investor's required rates of return?