Question

If the required rate of return is higher than the dividend rate of a preferred share, the par value is _______________ the current market value of the preferred share.

equal to

less than

higher than

independent of

Answer 1

Current market value of preferred stock = (Dividend rate / Required rate) * Par value

From the above equation following can be interpreted:

a) If required return < dividend rate, current price will be higher than par value

b) If required return > dividend rate, current price will be lower than par value

c) If required return = dividend rate, current price will be equal to par value

In this scenario since required rate of return is greater than the dividend rate the par value is higher than the current market value