Question

what is the value of a share of oasis corporation preferred stock if it is contracted to pay a $2.40 yearly dividend. oasis had earnings of $4.00 per share last year, pays out 35% of its earnings to common stockholders, its roe is 15%, and the required rate of return on preferred stock is 10%?

Answer 1

The value of a share of Oasis Corporation preferred stock is $24, calculated using the dividend discount model for preferred stocks with a $2.40 yearly dividend and a 10% required rate of return.

Step-by-step explanation:

The value of a share of Oasis Corporation preferred stock, which is contracted to pay a $2.40 yearly dividend, can be calculated using the dividend discount model (DDM) for preferred stocks. This model assumes that the dividend is fixed and will be paid indefinitely.

The formula to calculate the value of a preferred stock (P) is P = D / r, where D is the yearly dividend, and r is the required rate of return on preferred stock. In this case, P = $2.40 / 0.10 = $24. Therefore, the value of a share of Oasis Corporation preferred stock is $24. This calculation ignores the company's earnings, payout ratio to common stockholders, and return on equity (ROE), as they do not impact the value of preferred stock which pays a fixed dividend.