(a) Company A has issued perpetual preferred stock with a par value of $100. The stock pays an annual dividend of $6 and its current price is $60.
(i) What is the dividend yield of Company A’s preferred stock?
(ii) What is the total return of holding Company A’s preferred stock for year 1?
(b) Company B has just paid a dividend of $2.45 per share. The company will increase its dividend by 20% next year and then reduce its dividend growth rate by 5 percentage points per year in the second and third years, followed by a constant 5% growth every year thereafter. If your required rate of return is 11%, what is the maximum price that you would be willing to pay for this company’s shares?
Please list the calculation steps