1. Bleeding Gum Saxophone, Inc just paid a $1.50 dividend (D0 = 1.50). It is expected to grow at 15% over the next year and then at 5% per year thereafter. The required rate of return on the stock is 8%. What is your estimate of the stock's current price?
2. Several years ago, Burns & Smithers Antiques issued preferred stock with a stated annual dividend of 10% of its $100 par value. Preferred stock of this type currently yields 5%. Assume dividends are paid annually.
a. What is your estimate of the price of this preferred stock?
b. Suppose interest rate levels have risen to the point where the preferred stock now yields 8%. What would be the new estimated value of this preferred stock?