Question 1
If Genco's preferred stock pays a dividend of $5 per share and its investors require an 8% return, what should its price per share of preferred stock be?
◦ $50.00
◦ $.40
◦ $62.50
◦ $6.25
◦ $12.75
Question 2
Pan Am Airlines issued emergency preferred shares after its reorganization. The preferred share has a fixed dividend of $1 payable at the end of each of the next three years. At the end of the three years it matures and pays its par value. The par value is equal to the value of the common shares at that time. The common shares are currently trading for $37.08. They pay no dividends currently, but are forecast to begin paying a dividend in four years at $3.55 per share. The dividend is expected to grow at 4% in perpetuity and common shareholders expect a return of 11%. What is the fair market value for the preferred shares today if the preferred shareholders require a 9% rate of return?
◦ $37.08
◦ $38.46
◦ $38.63
◦ $39.16
◦ $41.69
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