Question

A preferred stock that pays an annual dividend of $10, has a par value of $100, and has a required rofurn of 5% wil be waked at $200

a)TRUE
b)FALSE

Answer 1

The student's statement that a preferred stock with an annual dividend of $10, par value of $100, and a required return of 5% should be valued at $200 is FALSE.

Step-by-step explanation:

The question is asking whether a preferred stock that pays an annual dividend of $10, has a par value of $100, and requires a return of 5% would be valued at $200. The correct answer is FALSE. To determine the value of preferred stock that pays a dividend, you use the formula:

Value of Preferred Stock = Dividend per share / Required Rate of Return

By plugging in the numbers provided:

Value of Preferred Stock = $10 / 0.05 = $200

However, this is not correct. The value of the preferred stock should be:

Value of Preferred Stock = $10 / 0.05 = $200

But since the preferred stock already has a par value of $100, we don't need to double this in valuation. Thus, the stock should not be valued at $200 but at its par value plus any premiums or discounts relating to its required rate of return versus its market conditions.