Question

You want to estimate the price of a share of preferred stock that receives an annual...

You want to estimate the price of a share of preferred stock that receives an annual dividend of $6.25. You predict that the stock will be called in 8 years and you will be paid $110 for your share. If you require a 7% rate of return on your investment, what is the maximum price you will pay for the stock? (Round to two decimal places.)

Business   Finance   
0 0
Add a commentTranscribed image text
Next >

Homework Answers

Answer #1

Price or intrinsic value of the preferred stock will be the present value of cash inflows from the preferred stock, i.e., present value of future dividends and call price using 7% as the discount rate (required return).

Preferred stock price = $6.25 x PVIFA (7%, 8) + $110 x PVIF (7%, 8) = $6.25 x 5.97129850606 + $110 x 0.58200910453 = $101.3416172 or $101.34

Note : PVIF = present value interest factor of $1 = 1 / (1 + r)n

PVIFA = present value interest factor annuity of $1 =

where, r is the discount rate, n being the no. of years

0 0
Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
1. What is the price of a share of preferred stock that has a dividend of...
1. What is the price of a share of preferred stock that has a dividend of $3 if the cost of preferred (rp) is 15% 2. What would you pay for a share of common stock if you expect the next dividend to be $3 and you expect to sell it in one year for $25, assuming the cost of equity (re) is 15%. 3. MBV is a cruise line which announced that dividends are expected to grow by 3.5...
1. What should be the price of a stock that offers a $5 annual dividend with...
1. What should be the price of a stock that offers a $5 annual dividend with no prospects of growth, and has a required return of 11%? $4.86 $45.45 $34.56 $30.24 2. Venus Sportswear Corporation has preferred stock outstanding that pays a quarterly dividend of $2. It has a price of $100. What is the required rate of return on the preferred stock? 10% 2% 2.5% 8% 3. RTF, Inc. common stock pays an annual dividend that increases by 4.4%...
eBook Torch Industries can issue perpetual preferred stock at a price of $59.50 a share. The...
eBook Torch Industries can issue perpetual preferred stock at a price of $59.50 a share. The stock would pay a constant annual dividend of $5.00 a share. What is the company's cost of preferred stock, rp? Round your answer to two decimal places. %
Shiny Industries producers of crab meat can issue perpetual preferred stock at a price of $37.79...
Shiny Industries producers of crab meat can issue perpetual preferred stock at a price of $37.79 per share. The stock would pay a constant annual dividend of $6.25 per share. What is the company's return on preferred stock (r)?
Preferred stock has a par (face) value of $80. The annual dividend is $6.00 per share....
Preferred stock has a par (face) value of $80. The annual dividend is $6.00 per share. Investors in this preferred stock have a required rate of return equal to 8%. Compute the current price of a share of the preferred stock. Round to the second decimal place
TXS Manufacturing has an outstanding preferred stock issue with a par value of ?$69 per share....
TXS Manufacturing has an outstanding preferred stock issue with a par value of ?$69 per share. The preferred shares pay dividends annually at a rate of 11% a.??What is the annual dividend on TXS preferred? stock? b.??If investors require a return of 4% on this stock and the next dividend is payable one year from? now, what is the price of TXS preferred? stock? c.??Suppose that TXS has not paid dividends on its preferred shares in the last two years...
Fifth National Bank just issued some new preferred stock. The issue will pay an annual dividend...
Fifth National Bank just issued some new preferred stock. The issue will pay an annual dividend of $19 in perpetuity, beginning 8 years from now. If the market requires a return of 3.3 percent on this investment, how much does a share of preferred stock cost today? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
TXS Manufacturing has an outstanding preferred stock issue with a par value of ​$6060 per share....
TXS Manufacturing has an outstanding preferred stock issue with a par value of ​$6060 per share. The preferred shares pay dividends annually at a rate of 1111​%. a.  What is the annual dividend on TXS preferred​ stock? b.  If investors require a return of 88​% on this stock and the next dividend is payable one year from​ now, what is the price of TXS preferred​ stock? c.  Suppose that TXS has not paid dividends on its preferred shares in the...
Preferred Products has issued preferred stock with an annual dividend of $5.60 that will be paid...
Preferred Products has issued preferred stock with an annual dividend of $5.60 that will be paid in perpetuity.a. If the discount rate is 10.00%, at what price should the preferred sell? (Round your answer to 2 decimal places.) b. At what price should the stock sell 1 year from now? (Round your answer to 2 decimal places.) c. What is the dividend yield, the capital gains yield, and the expected rate of return of the stock? (Enter your answers as...
You estimate the beta of a preferred stock you’re considering buying at 1.2. The risk free...
You estimate the beta of a preferred stock you’re considering buying at 1.2. The risk free rate is 3% currently and the market is expected to return investors 8% (over the long run, maybe not tomorrow!). The preferred dividend is $140 per year per share. If it turns out that the beta of the stock is 1.0, what is likely to happen to the value of your investment? By how much, exactly?
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT