Answer Happy

Some of the local licensed stockbrokers offer investors the opportunity to invest in international equities. In an effort to have a diversified portfolio, you are considering investing in a few stocks that are traded in the United States. You have chosen Pepsico, a company you are familiar with. The company has both common and preference shares. Required: i. Common shares: Pepsico is expected to pay dividends over the next four years as follows: Year 1 $1.50 Year 2 $1.50 Year 3 $1.25 Year 4 $1.25 Thereafter, the company is expected to increase dividends by an annual rate of 2%. If your required return on these shares is 9%. How much would you be willing to pay for a share of this stock today? 10 Marks ii. Preference shares: The Company's preference shares pay an annual dividend of $1.50. With preference shares being slightly less risky than common shares, your required return is 8%. How much would you be willing to pay for a share of this stock today? 3 Marks