Wernam Hogg Class A preferred shares have a par value of 100 and offer an annual dividend at 0.8 of par value. Wernham Hogg is experiencing cash flow problems due to poor market conditions in the commercial paper business.
The company has suspended dividends on the Class A preferred shares. Analysts do not expect the dividends to resume for another 3 years, at which point they are expected to resume in perpetuity. If investors require a return of 2.25, then what is the fair price for the preferred shares today?
A) 34.01
B) 34.77
C) 35.56
D) 96.65
E) 340.08
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?
A) 37.08
B) 38.46
C) 38.63
D) 39.16
E) 41.69
Question 3
A bank is legally obligated to provide credit under a revolving credit agreement, but not under a
line of credit.
Indicate whether the statement is true or false
Annual Rings
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