1) The financial manager of Options Inc. has just been awarded a bonus of 1,000 preferred shares of the company. The market expects Options preferred stock to pay a dividend of $3.00 next year, and that dividend is expected to continue forever. The manager knows that next year’s dividend is actually going to be only $2.20, but that it will grow at a rate of 3% forever. This fact will be announced to the market shortly. The manager needs to make a down payment on a new house, and wants to sell his 1,000 shares. When should he sell, before the announcement is made or after? Assume the required rate of return on Options Inc. shares is 15%. Assume there are no legal restrictions on the manager’s decision.
2) Complete Storage Company’s (CSC) common stock has a current dividend of $2.00 per share. The dividend is expected to grow at 40% annually for two years and then grow at 5% annually thereafter. The required rate of return is 14% What is the current price of a share of CSC common stock?
2) a) Complete Storage Company’s (CSC) common stock has a current dividend of $2.00 per share. The dividend is expected to grow at 40% annually for two years and then grow at 5% annually thereafter. The required rate of return is 14%. Suppose you purchase 100 shares of CSC’s stock at its current market value. You collect the dividend paid in year 1, year 2, and year 3. At the end of year 3, you then sell the shares for $48 per share. What is your holding period return? What annual rate of return did you effectively earn on your investment?