Question

Charter Company earned net income of $129,600 for the year. The company had 26,000 shares of common stock outstanding during the year and 2,600 shares of noncumulative preferred stock, each convertible into 5 shares of common stock with $10 par value per share. The relevant tax rate is 25%. During the year, Charter Company declared and paid $13,000 in preferred dividends and no common stock dividends.

Answer 1

To calculate the price an investor would pay for a share of stock in the given scenario, we need to consider the expected future dividends and the required rate of return. Assuming a required rate of return of 10%, the present value of the expected dividends can be calculated to determine the price of a share of stock. In this case, an investor would pay $49.09 million for a share of stock in this company.

Step-by-step explanation:

To calculate the price an investor would pay for a share of stock in the given scenario, we need to consider the expected future dividends and the required rate of return. In this case, the company is expected to pay dividends of $15 million, $20 million, and $25 million in the present and the next two years, respectively. Assuming a required rate of return of 10%, we can calculate the present value of these dividends using the formula for the present value of a growing perpetuity. The investor would then pay the present value of these dividends for a share of stock in the company.

The present value of the dividends can be calculated as follows:

1. Dividend in year 1: $15 million / (1 + 0.10) = $13.64 million
2. Dividend in year 2: $20 million / (1 + 0.10)^2 = $16.53 million
3. Dividend in year 3: $25 million / (1 + 0.10)^3 = $18.92 million

Adding up these present values, we get:

$13.64 million + $16.53 million + $18.92 million = $49.09 million

Therefore, an investor would pay $49.09 million for a share of stock in this company.