You observe Thundering Herd Common Stock selling for 40.00 per share. The next dividend is
expected to be 4.00, and is expected to grow at a 5 annual rate forever. If your required rate of
return is 12, should you purchase the stock?
A) yes, because the present value of the expected future cash flows is greater than 40
B) yes, because the present value of the expected future cash flows is less than 40
C) no, because the present value of the expected future cash flows is less than 40
D) no, because the present value of the expected future cash flows is greater than 40
Question 2
The preferred stock of Wells Co. sells for 17 and pays a 1.75 dividend. The net price of the stock after issuance
costs is 15.30. What is the cost of capital for new preferred stock?
What will be an ideal response?
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