Question

What is the value of a preferred stock where the dividend rate is 17 percent on a $100 par value, and the market's required yield on similar shares is 13 percent?

Answer 1

The value of the preferred stock is calculated using the formula which divides the annual dividend by the market's required yield. With a dividend rate of 17% on a $100 par value with a required yield of 13%, the preferred stock is valued at approximately $130.77.

Step-by-step explanation:

To calculate the value of a preferred stock with a dividend rate and a market's required yield, we use the formula for the value of preferred stock, which is the annual dividend divided by the market's required yield. In this case, we have a 17 percent dividend rate on a $100 par value, meaning the annual dividend is $17 ($100 x 0.17). With the market's required yield being 13 percent, we divide the annual dividend by the yield to get the value of the preferred stock.

The formula would be as follows: Value of Preferred Stock = Annual Dividend / Market's Required Yield. So, the calculation is $17 (0.17 x $100) divided by 0.13. By performing this calculation, we find that the value of the preferred stock is approximately $130.77.