CMA Study Group

Can someone please help me how can i use the calculator to get the answer instead of using the formula they have in their solution? I have Texas Instrument BAII PLUS

Question

Company A is offering a common stock that is expected to pay the following dividends: $10 next year, $20 the following year, and grow in perpetuity of 2%. Meanwhile, Company B offers a preferred stock with a par value of $200 and a 12% dividend rate. Both companies have an 8% cost of capital. If both stocks are being offered at $300, which is a better investment?

Solution: 

Correct. Company A's common stock value is $318, which is greater than the value of Company B's preferred stock at $300. Therefore, Company A is a better investment than Company B.

• Computation of Company A stock price: [10 / (1 + 8%)] + {20 / [(1 + 8%)²]} + {[20 × (1 + 2%)] / [(1 + 8%)³]} + {[20 × (1 + 2%)²] / (8% − 2%) / [(1 + 8%)³]
• Computation of Company B stock price: (200 × 12%) / (8% − 0%)

------------------------------
Nedal Abuzaki
Director/Manager
Clearwater FL
United States
------------------------------

1. Multiply dividend with each year pv factor(as per chart) & add each dividend 
2. For perpetual yield calculate future dividend i.e.20+2% dividend the same by 6% which is retention rate
3. Add 1& 2 you will get the value of A

------------------------------
Rohan Tambadkar
None
Mumbai MH
India
------------------------------