Wgu Financial Management C214 Study Guide Rated A+

Equity (preferred stock valuation) {Ans: Vps = D/kps [or] V=D/r where Vps is the value or price of the stock, D is the annual fixed dividend and kps is the discount rate or required rate of return (not the dividend rate). Using the Gordon Growth Model we can adjust by taking out "g" since there is a fixed dividend. from V0= D0(1+g)/(Kcs-g) to V0=D0/Kps EX: Xerox issued $75 million worth of 8.25% preferred stock at $50 per share par value. Required rate of return is 9.50%. What would we pay for the stock today? To calculate the fixed annual dividend, simply multiply the par value by the quoted percentage to get .0825 × $50 = $4.125 per year. Vps = D/kps Vps = $4.125 / .095 = $43.42 As with the Gordon Growth Model, the preferred stock equation can be manipulated to solve for D or kps D = V * kps kps = D/V V=D/r Perpetuity (forever pmts): CF / r [or] V= D/r}Annuities (deferred) {Ans: Deferred Annuities: A deferred annuity is just an equal series of payments that starts sometime in the future. Calculating the PV of deferred annuities requires multiple steps. EX: Suppose you retire