More FINANCE Problems:: enjoy!?

Assume that you would like to purchase 100 shares of preferred stock that pays an annual dividend of $6 per share. However, you have limited resources now, so you cannot afford the purchase price. In fact, the best that you can do now is to invest your money in a bank account earning a simple interest rate of 6% but where interest is compounded daily (assume a 365-day year). Because the preferred stock is riskier, it has a required annual rate of return of 12%. (Assume that this rate will remain constant over the next 5 years.) For you to be able to purchase this stock at the end of 5 years, how much must you deposit in your bank account today, at t = 0?

a.2985

b.4291.23

c.3138.52

d.3704.18

e.4831.25

More FINANCE Problems:: enjoy!?bridge loan

I say d. 3704.18. Here%26#039;s why I think that:

- The information says that the required rate of return is 12%. I believe that means the price of the stock is $50, since 12% of $50 is the $6 that%26#039;s being paid. ($6/.12=$50)

- Preferred stock is in many ways more like a bond than a stock. The price of the stock doesn%26#039;t go up and down much, so it will probably still be $50 in 5 years. (The primary benefit of a preferred stock is the dividends it pays.) I think that%26#039;s what they%26#039;re saying with the %26quot;assume this rate will remain constant%26quot; statement.

- To buy 100 shares of a $50 stock, you will need $5000 (not including commissions, which I guess they%26#039;re ignoring).

- The formula for compounded interest is (1 plus the rate for one period) to the %26quot;number of periods%26quot; power or (1+r)^p.

- In this case, the period is one day since that%26#039;s how often the interest is compounded.

- 6% annual simple interest is .06/365 per day, so that will be r

- 5 years at 365 days per year is 1825 days, so that will be p

- (1+(.06/365))^1825 = 1.3498255 so that%26#039;s how much $1 invested today will be worth in 5 years (not including taxes which I guess they%26#039;re ignoring also)

- So to know how many dollars you need to invest today, you need to divide the amount you need in 5 years by the amount each dollar you invest today will be worth then, in other words $5000/1.3498255 = $3704.18.

More FINANCE Problems:: enjoy!?

loan

If you have to work this hard for the answer, you need a better financial planner.|||You don%26#039;t say the price of the shares now, but with a dividend of $6 I%26#039;m guessing between $100 and $200 so if you can%26#039;t afford them now you certainly won%26#039;t in 5 years even if you could find a bank paying 6% on $4831.25.

I have to assume I have completely misunderstood your question?????

Very funny hrh_grac. But true.