Presently, Stock A pays a dividend of $1.00 a share, and you expect the dividend to grow rapidly for the next four years at 20 percent. Thus, the dividend payments will be Year Dividend 1 $1.20 2 1.44 3 1.73 4 2.07 After this initial period of super growth, the rate of increase in the dividend should decline to 2 percent. If you want to earn 6 percent on investments in common stock, what is the maximum you should pay for this stock?

We should pay $46.50 for this stock.

Explanation:

The stock value is the present value of all the future dividends associated with the stock.

Following is the working to calculate the stock value.

Dividend

Year Dividend

_1 $1.20

_2 ___ $1.44

_3 ___ $1.73

_4 ___ $2.07

Use following formula to calculate the present value of all the dividends

Present value of Dividend = Dividend value x ( 1 + Expected interest rate )^numbers of years

Now calculate the present value of al the dividends

Year __Working Present values

_1 $1.20 x ( 1 + 6% )^-1 $1.132

_2 ___ $1.44 x ( 1 + 6% )^-2 $1.282

_3 ___ $1.73 x ( 1 + 6% )^-3 $1.453

_4 ___ $2.07 x ( 1 + 6% )^-4 $1.640

_5 to onward ___ [$2.07 / ( 6% - 2% )] x ( 1 + 6% )^-4 _ $40.991

Total $46.498

We should pay $46.50 for this stock.

a naked warrant, also known as a covered warrant, is a derivative that allows the holder to buy or sell a security, such as a bond or share. unlike a normal warrant, it is not attached to a newly issued bond or preferred stock.

unsecured bonds: they are not secured by a specific asset, but rather by "the full faith and credit" of the issuer. in other words, the investor has the issuer's promise to repay but has no claim on specific collateral. debt, such as unsecured bond debt, is said to be “subordinated,” or junior, to secured debt.