Question

(Preferred stock valuation) What is the value of a preferred stock where the dividend rate is 13 percent on a \( \$ 100 \) par value, and the market's required yield on similar shares is 12 percent? T

Answer 1

The value of the preferred stock with a 13% dividend rate on a $100 par value and a required yield of 12% is estimated to be $108.33 using Present Discounted Value.

Step-by-step explanation:

The value of preferred stock can be determined using the concept of Present Discounted Value (PDV). Since the preferred stock pays a fixed dividend, its value can be calculated as the annual dividend divided by the market's required yield. Given a dividend rate of 13% on a $100 par value, the annual dividend is $13 ($100 * 0.13). The market's required yield on similar shares is 12%. Therefore, the value of the preferred stock is the dividend ($13) divided by the required yield (0.12), which equals approximately $108.33.The value of the preferred stock with a 13% dividend rate on a $100 par value and a required yield of 12% is estimated to be $108.33 using Present Discounted Value.