Question: East Harbor Company (EHC) has both preferred and common stocks outstanding. EHC has just paid a $4 dividend per share of preferred stock and a

East Harbor Company (EHC) has both preferred and common stocks outstanding. EHC has just paid a $4 dividend per share of preferred stock and a $3.50 dividend per share of common stock.

a. Assume the dividend on the preferred is constant and that preferred stocks with similar risk to that of EHC are yielding 8.6 percent. What is its estimated value of EHC's preferred stock?

b. Suppose EHC's preferred stocks are currently trading at $48.68. How can you interpret the difference between the estimated value and the observed market price?

c. Assume EHC's dividend per common share is expected to increase by 8 percent per year during the next three years and then rise at a constant rate of 4 percent forever. What is the estimated value of EHC's common stock if the required rate of return for this type of investment is 12 percent?

d. Suppose EHC's common stocks are currently trading at $53.24. How can you interpret the difference between the estimated value and the observed market price?

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