Question

A firm has preferred stock outstanding. This stock has made constant dividend payments of $5.95. This...

A firm has preferred stock outstanding. This stock has made constant dividend payments of $5.95. This stock has a beta of 1.5, the risk free rate is 4.4% and the market risk premium is 5.3%. Assuming this trend continues indefinetly, what is the intrinsic value of the stock in 10 periods, just after the 10th dividend is paid?

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Answer #1

$ 48.18

Working:

Step-1:Calculate Required rate of return
Required rate of return = Risk Free Assets + Beta * Risk Premium
= 4.4% +             1.5 *5.3%
= 12.35%
Step-2:calculate Price of Preferre stock
Price of preferred Stock = Annual Dividend / Required rate of return
= $       5.95 / 12.35%
= $    48.18
Since, Preferred stock pays constant dividend, Price of Preferred stock is always same which will be present value of indifinite dividend.
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