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.)

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

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