Question

Your financial management team has recommended the company set a $2.85 dividend on its upcoming new issue of preferred shares. If the required return on those shares is 7.3%, what is the price expected to be?

(A) $39.04
(B) $20.81
(C) Unknown without the growth rate.

Answer 1

The price of the preferred share, based on a $2.85 dividend and a 7.3% required return, is calculated using the formula Price = Dividend / Required Return, resulting in $39.04.

Step-by-step explanation:

The question pertains to calculating the price of a preferred share based on its dividend and required rate of return. To determine the price of the share, we use the formula Price = Dividend / Required Return. In this scenario, the financial management team has set a $2.85 dividend on the new issue of preferred shares with a 7.3% required return.To calculate the price expected for the new issue of preferred shares, we need to use the formula for the present value of dividends.

The formula is: P = D / r, where P is the price of the preferred shares, D is the dividend, and r is the required return. In this case, the dividend is $2.85 and the required return is 7.3%. So, the price expected to be is $39.04.Using the formula:Price = $2.85 / 0.073 = $39.04Therefore, the expected price for the preferred share is $39.04.