Question

Pioneer's preferred stock is selling for $39 in the market and pays a $4.30 annual dividend.

a. If the market's required yield is 9 percent, what is the value of the stock for that investor?
b. Should the investor acquire the stock?

Answer 1

To calculate the value of Pioneer's preferred stock for an investor, use the formula Value = Dividend / Required Yield. The value of the stock for the investor is $47.78, but since the market price is $39, the investor should not acquire the stock.

Step-by-step explanation:

To calculate the value of Pioneer's preferred stock for an investor, we can use the formula for the present value of a dividend-paying stock. The present value of the stock can be calculated using the dividend and the required yield. In this case, the dividend is $4.30 per year and the required yield is 9 percent.

The formula for calculating the value of a dividend-paying stock is:

Value = Dividend / Required Yield

Substituting the values, we have:

Value = $4.30 / 0.09 = $47.78

Therefore, the value of the stock for the investor is $47.78.

Since the market price of the stock is $39, the investor should not acquire the stock as it is priced below its value.