Question

A) Shayne Inc. is expected to pay an annual dividend each year of $5.40 per share of common stock. The current rate of return investors require is 8.6%. Calculate the expected price of the common stock.

b) Hansen Inc. issued preferred stock at $10,000 with a 4.5% dividend. The current rate of return investors require is 8.2%. Calculate the expected price of the preferred stock.
c) Assume the U.S. begins issuing consols, a government security without a maturing date. Assume a consol has a face value of $50,000 and pays interest of 3.8%. Dr. Wee wants ta 6.8% return for this investment. Calculate the value of the consol to Dr. Wee.
d) Morrow Corp. is selling a product that it expects will generate cash flows of $1,200,000 every year. The company's required rate of return is 7.5%. Calculate the value of this product to Morrow Corp.
e) Liu Company has an offer from another firm to buy its Jia Juice product. Liu Company expects Jia Juice will continue to generate cash flows of $775,000 every year. Liu Company's required rate of return is 8.9%. Calculate the minimum price Liu Company would accept to sell Jia Juice.

Answer 1

The expected price of Shayne Inc.'s common stock is $62.79 per share; Hansen Inc.'s preferred stock should be priced at $5487.80; Dr. Wee would value a $50,000 consol at $27,941.18; the value of Morrow Corp.'s constant cash flows is $16,000,000; and Liu Company's minimum selling price for Jia Juice is $8,707,865.17.

Step-by-step explanation:

To calculate the expected price of common stock for Shayne Inc., we use the dividend discount model (DDM), which is P = D / r, where P is the price, D is the annual dividend, and r is the required rate of return. So, P = $5.40 / 0.086, which gives P = $62.79 per share.

For the preferred stock of Hansen Inc., we again use the formula P = D / r. The annual dividend is 4.5% of the $10,000 face value, so D = 0.045 × $10,000 = $450. Using r = 0.082, we get P = $450 / 0.082, which results in P = $5487.80 for the price of the preferred stock.

To calculate the value of a consol for Dr. Wee, we also use P = D / r. The annual payment is 3.8% of the $50,000 face value, so D = 0.038 × $50,000 = $1900. Using Dr. Wee's required rate of return of 6.8% (r = 0.068), we get P = $1900 / 0.068, which results in P = $27,941.18.

The value of the product generating constant cash flows for Morrow Corp. is calculated using the perpetuity formula P = C / r, where C is the annual cash flow. So, P = $1,200,000 / 0.075, which gives P = $16,000,000.

Finally, to calculate the minimum price Liu Company would accept to sell its Jia Juice product, we use the perpetuity formula P = C / r, with C = $775,000 and r = 0.089. This gives us P = $775,000 / 0.089, which calculates to P = $8,707,865.17 as the minimum selling price.