Finance Question

 

Problem 1

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Dartmouth Subsidiaries has three preferred shares issues outstanding.  Series A is a perpetual preferred share that has a par value of $35.00 that pays an annual dividend of $3.15.  The company’s series B preferred shares mature in 8 years and pay a 7 percent annual dividend and have a par value of $75.00. The company’s series C preferred shares are participating, mature in 8 years and pay a 7 percent annual dividend and have a par value of $75.00.

 

  1. You observe that the company’s series A preferred shares are selling for $33.00 in the market today. Calculate the market rate of return for the company’s series A preferred shares. Show your work!
  2. The company’s series B preferred shares have the same risk as the series A preferred shares and will; therefore, have the same required rate of return. Calculate the current market price of the series B preferred shares. Show your work!
  3. The company’s series C preferred shares have a participating feature. Series C have the same risk as the series A preferred shares and will; therefore, have the same required rate of return. Management expects growth of 2 percent per year. Calculate the current market price of the series C preferred shares. Show your work!

Problem 2

Down-east Industries Incorporated has just paid its most recent cash dividend of $3.00 per share. Management expects dividends to grow at a constant rate of 8 percent per year forever and investors require a 16 percent rate of return.

  1. What is the expected price of the share today? Show your work!
  2. What is the expected price of the share 5 years from today? Show your work!

Problem 3

It was anticipated that Down-east Industries Incorporated would pay a cash dividend of $3.00 per share at the end of year 0 in problem 2a. The board of directors approved the suspending of dividends for year 0 and the suspension of dividends for the next 5 years as the company undertakes major expansion projects and reinvests all the earnings (100 percent retention ratio). The company anticipates the next dividend that will be paid will be $7.00. Management expects that dividends will grow at a constant rate of 5 percent per year forever and investors require an 18 percent rate of return.

  1. What is the expected price of the share today? Show your work!
  2. Should Down-east Industries take on this project or continue on as per problem 2a – reject the new investment and pay the $3.00 dividend? Explain!
  3. What is the minimum cash dividend the company will need to pay for the share to maintain its current market price as calculated in Problem 2? Show your work!

Problem 4

The Bluenose Chip Company is experiencing rapid growth. The company expects dividends to grow at 15% per year for the next 4 years before leveling off at 6% into perpetuity. The required return on the company’s stock is 15%. The dividend per share just paid was $1.25.

Calculate the current market value of Bluenose Chip’s stock. Show your work!

Problem 5

The most recent dividend Blue Mountain Breweries Limited paid was $3 per share. The company expects to pay the same dividend each year. The required rate of return for this firm is 9%. A variety of proposals are being considered by management to redirect the firm’s activities. As a shareholder, which of the following proposal would you prefer? Show your work and explain your answer.

Proposal #1: Do nothing, which will leave the key financial variables unchanged and there are no growth opportunities.

Proposal #2: Invest in a new machine that will increase the dividend growth rate to a constant rate of 6%. However, this will increase the required rate of return to 14%.

Proposal #3: Expand operations to a new area that would increase the growth rate for the next three years to 6% and then remain constant at 2% per year forever. However, in this case the required rate of return is expected to decrease to 8%.

 

 

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