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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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  1. 26 February, 06:15
    0
    (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
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