FIN 534 RANK Imagine Your Future /fin534rank.com FIN 534 RANK Imagine Your Future /fin534rank.com | Page 67

c. The preemptive right is a provision in all corporate charters that gives
preferred stockholders the right to purchase (on a pro rata basis) new
issues of preferred stock.
d. One of the disadvantages to a corporation of owning preferred stock is
that 70% of the dividends received represent taxable income to the
corporate recipient, whereas interest income earned on bonds would be
tax free.
e. One of the advantages to financing with preferred stock is that 70% of
the dividends paid out are tax deductible to the issuer.
4. Church Inc. is presently enjoying relatively high growth because of a
surge in the demand for its new product. Management expects earnings
and dividends to grow at a rate of 25% for the next 4 years, after which
competition will probably reduce the growth rate in earnings and
dividends to zero, i.e., g = 0. The company’s last dividend, D0, was
$1.25, its beta is 1.20, the market risk premium is 5.50%, and the risk-
free rate is 3.00%. What is the current price of the common stock?
a. $26.77
b. $27.89
c. $29.05
d. $30.21
e. $31.42
5. Your boss, Sally Maloney, treasurer of Fred Clark Enterprises (FCE),
asked you to help her estimate the intrinsic value of the company's stock.
FCE just paid a dividend of $1.00, and the stock now sells for $15.00 per