Difference between common stock and preferred stock

Assignment Help Financial Management

Reference no: EM132003240

Robert Campbell and Carol Morris are senior vice-presidents of the Mutual of Chicago Insurance Company. They are co-directors of the company's pension fund management division. A major new client has requested that Mutual of Chicago present an investment seminar to illustrate the stock valuation process. As a result, Campbell and Morris have asked you to analyze the Bon Temps Company, an employment agency that supplies word processor operators and computer programmers to businesses with temporarily heavy workloads. You are to answer the following questions.

a. What is the difference between common stock and preferred stock? What are some of the characteristics of each type of stock?

b. (1) Write a formula that can be used to value any stock, regardless of its dividend pattern.

(2) What is a constant growth stock? How do you value a constant growth stock?

(3) What happens if the growth is constant, and g > rs? Will many stocks have g > rs?

c. Bon Temps has an issue of preferred stock outstanding that pays stockholders a dividend equal to $10 each year. If the appropriate required rate of return for this stock is 8%, what is its market value?

d. Assume that Bon Temps is a constant growth company whose last dividend (D0, which was paid yesterday) was $2 and whose dividend is expected to grow indefinitely at a 6% rate. The appropriate rate of return for Bon Temps' stock is 16%.

(1) What is the firm's expected dividend stream over the next 3 years?

(2) What is the firm's current stock price?

(3) What is the stock's expected value one year from now?

(4) What are the expected dividend yield, the capital gains yield, and the total return during the first year?

e. Assume that Bon Temps' stock is currently selling at $21.20. What is the expected rate of return on the stock?

f. Assume that Bon Temps is expected to experience supernormal growth of 30% for the next 3 years, then to return to its long-run constant growth rate of 6%. What is the stock's value under these conditions? What are its expected dividend yield and its capital gains yield in Year 1? In Year 4?

g. Suppose Bon Temps is expected to experience zero growth during the first three years and then to resume its steady-state growth of 6% in the fourth year. What is the stock's value now? What are its expected dividend yield and its capital gains yield in Year 1? In Year 4?

Reference no: EM132003240

Questions Cloud

How much will annuity be : He will take the proceeds and provide himself with a 16-year annuity. Assuming a 12 percent interest rate, how much will this annuity be?

What is the discounted payback for project : You are evaluating two mutually exclusive projects with following net cash flow. What is discounted payback for Project Y if the interest rate is 10% per year.

Describe any performance bond calls on your account : Describe any performance bond calls on your account. What is your cash balance with your broker as of the close of business on Friday?

What is the present value of your winnings : With a discount rate of 11 percent, what is the present value of your winnings?

Difference between common stock and preferred stock : What is the difference between common stock and preferred stock? What are some of the characteristics of each type of stock?

Estimates taxable estate : Jack is single and he made his first taxable gift of $1,000,000 in 2008. Jack estimates his taxable estate will be worth $5.4 million at his death.

Mortgages require annual year-end level amortization payment : Both mortgages require annual year-end level amortization payments. Find the amount of interest in the 5th payment of the new mortgage.

Assuming no market imperfections or tax effects exist : Assuming no market imperfections or tax effects exist, what will the share price be after:

Find future values of these ordinary annuities : Find the future values of these ordinary annuities. Compounding occurs once a year.

User Account

All Pages