Question 1: Present Value - Jack Hammer invests in a stock that will pay dividend of $2.00 at the end of the first year; $2.20 at the end of the second year; and $2.40 at the end of the third year. Also, he believes that at the end of the third year he will be able to sell the stock for $33. What is the present value of all future benefits if a discount rate of 11 percent is applied? Round all values to two places to the right of the decimal point.)
Question 2: Preferred Stock Value - North Pole Cruise Lines issued preferred stock many years ago. It carries a fixed dividend of $6 per share. With the passage of time, yields have soared from the original 6 percent to 14 percent (yield is the same as required rate of return).
a. What was the original issue price?
b. What is the current value of this preferred stock?
c. If the yield on the Standard & Poor's Preferred Stock Index declines, how will the price of the preferred stock be affected?
Question 3: Common Stock Value under Different Conditions - Friedman Steel Company will pay a dividend of $1.50 per share in the next 12 months (D1). The required rate of return (Ke) is 10 percent and the constant growth is 5 percent.
a. Compute P0.
(For part b, c, and d in this problem all variables remain the same except the one specifically changed. Each question is independent of the others.)
b. Assume Ke, the required rate of return, goes up to 12 percent; what will be the new value of P0?
c. Assume the growth rate (g) goes up to 7 percent; what will be the new value of P0?
d. Assume D1 is $2, what will be the new value of P0?