SunTech Corp. is a newly established US company. The current net income of the company is...

  

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SunTech Corp. is a newly established US company. The current net income of the company is $23 million US dollars. The company has issued both preferred and common shares. No dividends will be paid on any of the shares over the next three years. (a) State one possible reason to explain why the company chooses not to declare dividends for the next three years. (2 marks) (b) Suppose the company will pay a dividend of $2.5 per common share four years from today and indefinitely increase the dividend by 3 percent per year. If the required return on this stock is 12 percent, what is the price per common share in three years? What is the current share price? (5 marks) (c) Suppose the company decides to pay a dividend of $2 per preferred share four years from now and maintains the practice forever. If the required rate of return is 10 percent, what is the price per preferred share three years from now? What is the current share price for the preferred stock? (4 marks) (d) From the point of view of shareholders, name two differences between preferred and common stock. (4 marks) SunTech Corp. is a newly established US company. The current net income of the company is $23 million US dollars. The company has issued both preferred and common shares. No dividends will be paid on any of the shares over the next three years. (a) State one possible reason to explain why the company chooses not to declare dividends for the next three years. (2 marks) (b) Suppose the company will pay a dividend of $2.5 per common share four years from today and indefinitely increase the dividend by 3 percent per year. If the required return on this stock is 12 percent, what is the price per common share in three years? What is the current share price? (5 marks) (c) Suppose the company decides to pay a dividend of $2 per preferred share four years from now and maintains the practice forever. If the required rate of return is 10 percent, what is the price per preferred share three years from now? What is the current share price for the preferred stock? (4 marks) (d) From the point of view of shareholders, name two differences between preferred and common stock. (4 marks)

Answer rating: 100% (QA)

a One possible reason why the company chooses not to declare dividends for the next three years could be that it wants to reinvest the earnings back i... View the full answer