Preferred stock valuation Jones Design wishes to estimate the value of its outstanding preferred stock. The preferred issue has a par value of $100 and pays an annual dividend of $5.40 per share. Similar-risk preferred stocks are currently earning an annual rate of return of 10.4 %.

a) What is the market value of the outstanding preferred stock?

b) If an investor purchases the preferred stock at the value calculated in part a , how much does she gain or lose per share if she sells the stock when the required return on similar-risk preferred stocks has risen to 12.2 %?

Question

Business

Madison Hanson

26 February, 04:33

Preferred stock valuation Jones Design wishes to estimate the value of its outstanding preferred stock. The preferred issue has a par value of $100 and pays an annual dividend of $5.40 per share. Similar-risk preferred stocks are currently earning an annual rate of return of 10.4 %.

a) What is the market value of the outstanding preferred stock?

b) If an investor purchases the preferred stock at the value calculated in part a , how much does she gain or lose per share if she sells the stock when the required return on similar-risk preferred stocks has risen to 12.2 %?

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Answers (1)

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Kaitlin Avery · Answer 1

(a) $51.92

(b) She will face a loss of $7.66

Explanation:

(a) Market Value of Preferred Stock:

= Dividend : Required Return

= $5.40 : 10.4%

= $51.92

(b) If she sells the stock when the required return on similar-risk preferred stocks has risen to 12.2 %.

Market value of the securities:

= $5.40 : 12.2%

= $44.26

therefore,

Market value of the securities - Market Value of Preferred Stock

= $44.26 - $51.92

= $7.66

She will face a loss of $7.66