Anonymous asked in 商業及金融其他 - 商業及金融 · 6 years ago

Finance 問題 stock 急 20分

The frequency of paying dividends is crucial to most corporations. In general, quarterly dividends on stocks are usually paid instead of annual dividends. In order to manage the dividend policy effectively, the board of directors for ABC Co. reviews its current annual dividend policy and raises the following four proposals to its preferred stockholders. At present, ABC Co. pays a $12 annual dividend on its preferred stock. Assume that the required return on this preferred stock is 10%. The dividend is normally paid at the end of each period.

Proposal 1: the $1 dividend on its preferred stock is paid monthly

Proposal 2: the $3 dividend on its preferred stock is paid quarterly

Proposal 3: the $6 dividend on its preferred stock is paid semi-annually

Proposal 1: the $24 dividend on its preferred stock is paid bi-annually

(a)Describe the difference between APR and EAR.

(b)What is the current share price if ABC Co. maintains its present dividend policy?

(c)Analyze the price of ABC Co. preferred stock for the above 4 proposals, respectively.

(d)Discuss the relationship between the share price and the frequency of paying dividends.

(e)If you are the preferred stockholder, how could you recommend ABC Co. in terms of the dividend policy?

2 Answers

  • 6 years ago
    Favorite Answer

    A. APR is the simple interest annualised

    EAR is the compound interest annualised.

    EAR is calculated as (1+monthy rate/m)^m-1 where m is the number of compounding period per year.

    B .P0=DIV1/r-g

    P= $12/0.1


    D. Increase in dividend means the less the company plow back to reinvest, therefore the price will be lower

    2013-11-15 07:34:07 補充:

    Sorry i mean i didnt learn how to calculate part c. but hope can still help.

    Source(s): myself, but sorry i didnt learn how to calculate questions like b in my unit.
    • Login to reply the answers
  • 6 years ago


    APR is not the true compounding rate, EAR is the true compounding rate.

    1 + EAR = ( 1 + APR/m )^m where m is the compounding frequency per year.

    2013-11-05 23:36:30 補充:

    You are studying business course so you used the term APR, in financial mathematics, we also call APR as nominal interest rate.

    We call EAR as effective rate of interest (not necessarily annual)

    and we call the continuously compounded rate as force of interest.

    2013-11-05 23:38:50 補充:

    Usually we price the stock value as a perpetuity.

    Stock price = D/i where D is the dividend and i is the effective rate of interest with the dividend period.

    2013-11-05 23:40:43 補充:

    (b) Therefore, the price is $12/10% = $120

    • Login to reply the answers
Still have questions? Get your answers by asking now.