Achi Corp. has preferred stock with an annual dividend of $2.94. If the required return on Achi's preferred stock is 7.6%, what is its price? (Hint: For a preferred stock, the dividend growth rate is zero.)
Dividend Valuation
Dividend refers to a reward or cash that a company gives to its shareholders out of the profits. Dividends can be issued in various forms such as cash payment, stocks, or in any other form as per the company norms. It is usually a part of the profit that the company shares with its shareholders.
Dividend Discount Model
Dividend payments are generally paid to investors or shareholders of a company when the company earns profit for the year, thus representing growth. The dividend discount model is an important method used to forecast the price of a company’s stock. It is based on the computation methodology that the present value of all its future dividends is equivalent to the value of the company.
Capital Gains Yield
It may be referred to as the earnings generated on an investment over a particular period of time. It is generally expressed as a percentage and includes some dividends or interest earned by holding a particular security. Cases, where it is higher normally, indicate the higher income and lower risk. It is mostly computed on an annual basis and is different from the total return on investment. In case it becomes too high, indicates that either the stock prices are going down or the company is paying higher dividends.
Stock Valuation
In simple words, stock valuation is a tool to calculate the current price, or value, of a company. It is used to not only calculate the value of the company but help an investor decide if they want to buy, sell or hold a company's stocks.
![**Calculating the Price of Preferred Stock**
Achi Corp. has preferred stock with an annual dividend of $2.94. If the required return on Achi's preferred stock is 7.6%, what is its price? *(Hint: For a preferred stock, the dividend growth rate is zero.)*
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Achi's stock price will be $[ ] (Round to the nearest cent.)
**Explanation:**
To find the price of preferred stock, you can use the formula:
\[
\text{Price} = \frac{\text{Dividend}}{\text{Required Return}}
\]
In this case, the dividend is $2.94, and the required return is 7.6% (or 0.076 when expressed as a decimal).
Substitute these values into the formula to calculate the price.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F3f8a7250-9137-47ef-be98-4b87422d4696%2Fa8bec5bd-97d8-40b1-843f-c2a3d1dc1610%2Fu6dwfij_processed.jpeg&w=3840&q=75)
![Assume Evco, Inc. has a current stock price of $49.67 and will pay a $1.85 dividend in one year; its equity cost of capital is 11%. What price must you expect Evco stock to sell for immediately after the firm pays the dividend in one year to justify its current price?
We can expect Evco stock to sell for $ [_____] (Round to the nearest cent)](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F3f8a7250-9137-47ef-be98-4b87422d4696%2Fa8bec5bd-97d8-40b1-843f-c2a3d1dc1610%2F5ihl9jn_processed.jpeg&w=3840&q=75)
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