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FastandFurious Company is issuing preferred stocks paying a dividend of $20 per year. Investors estimate that...

FastandFurious Company is issuing preferred stocks paying a dividend of $20 per year. Investors estimate that they can invest in this security with a 12% rate of return. Coupon rates of similar securities are estimated to be 9%.
What maximum price would you be willing to put in this security?
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Answer #1

given data

a) company paying a dividend of $ 20 per year

b) rate of return 12 %

c) similar securities in the market are giving a 9 % rate of return.

the formula to calculate the maximum stock price

Vp = D /K

Whereas D = Dividend of last year

K =required rate of return, The required rate of return is the minimum return an investor will accept for owning a company's stock, that compensates them for a given level of risk i.e 12 %

hence Value of preferred stock = 20/12%

= $166.67

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