Question

5 P&G issues preferred stock that pays an annual dividend of $2.75. If we use a required rate of return of 6.25%, value this preferred stock. a 66.00 b 44.00 C 22.00 d 11.00 6 The New York Stock Exchange a is built with a giant wall around it, that's why they call it Wall Street b has only 500 exchange members who own seats C is an electronic market like NASDAQ d is both an electronic market, and face-to-face market 7 A share of Sherwin Williams common stock has just paid an annual dividend of $4.52. If the expected long-run growth rate for this stock is 6 percent, the market rate for stocks is 10%, and the risk free rate is 1.5%. What is Sherwin William's stock price if it's beta is 1.25 and the historic dividend growth rate is 5% a. 21.36 b. 47.17 C. 54.25 d. 66.61

Answer 1

Answer to Question 5: Option B (workings given below)

To calculate value of preferred stock, Three variables are included in the Gordon Growth Model formula:

i) D1 or the expected annual dividend per share for the following year

ii) ke or the required rate of return

iii) g or the expected dividend growth rate.

With these variables, the value of the stock can be computed as:

Intrinsic Value = D1/ (ke – g)

VALUE OF PREFERRED STOCK
Particulars	Amount	Remarks
Growth rate (g)	0.00%	A
Required return (Ke)	6.25%	B
Dividend (D1)	$                      2.75	C
Difference between Ke and g	6.25%	D = B - A
expected value of company's stock @ 11%	$                    44.00	E = C ÷ D

Answer to Question 6: Option D

Reason for the above answer : While trading on the floor of the exchange is being quickly eroded by electronic trading platforms, the open outcry method of trading doesn't appear to be completely going away any time soon. There are still traders who work on the floor of the New York Stock Exchange (NYSE)

Answer to Question 5: Option D (workings given below)

The formula for calculating the expected return of an asset given its risk is as follows:

Expected return=Rf​+β​∗(Rm​−Rf​)

where:

Rf is risk free return

β IS beta for the return

Rm is market return

Three variables are included in the calclation of value of stock, Gordon Growth Model formula:

i) D1 or the expected annual dividend per share for the following year

ii) ke or the required rate of return

iii) g or the expected dividend growth rate.

With these variables, the value of the stock can be computed as:

Intrinsic Value = D1/ (ke – g)

CALCULATION OF REQUIRED RETURN (Ke)
Particulars	Amount	Remarks
Risk free rate	1.50%	A (given)
Market return	10.00%	B (given)
Risk premium	8.50%	C = B -A
Beta	1.25	D (given)
Beta x risk premium	10.63%	E = C * D
Required return (Ke)	12.13%	F = A + E
EXPECTED VALUE OF THE COMPANY'S STOCK
Particulars	Amount	Remarks
Dividend (D0)	$                      4.52	A (given)
Growth rate (g)	5.00%	B
Required return (Ke)	12.13%	C (calculated above)
Dividend (D1)	$                      4.75	D = A * (1+B)
Difference between Ke and g	7.13%	E = C - B
expected value of company's stock	$                    66.61	F = D ÷ E