Musical Memories, Inc. has 230,000 shares of common stock outstanding as a market price of $14 per share. The historical dividends (per share) for the firm were as follows:
2007: $1.10
2008: $1.10
2009: $1.12
2010: $1.15
2011: $1.17
2012: $1.20
Musical Memories also has 8,000 bonds outstanding that are currently selling for 102 percent of face value. The bonds carry an 8.5% coupon rate and mature in 5 years. There are also 51,000 shares of preferred stock outstanding currently selling for $38 per share with an annual dividend of $2.25, perpetually. The firm’s marginal tax rate is 35%.
What is your best estimate for the average growth rate in dividends paid to common stockholders?
a. 1.67% b. 1.76% c. 2.12% d. 1.54% e. 2.20%