Question

Swan Ltd has preference shares outstanding that pay a fixed dividend of $2.70 each year. If investors require a return of 14%, what is the current value for the shares?

	a.	$27.00
	b.	$2.37
	c.	$192.90
	d.	$1.93
	e.	$19.29

Answer 1

Current value for the preferred shares

The price that would be willing to pay for the preference share is calculated by using the following formula

Price of the Preferred Stock = Annual Preferred Dividend / Required rate of return

Here, we’ve Annual Preferred Dividend per share = $2.70 per share

Required Rate of Return = 14.00%

Therefore, the Price of the Preferred Stock = Annual Preferred Dividend / Required rate of return

= $2.70 per share / 0.14

= $19.29 per share

“Hence, the current value for the shares will be $19.29”