Question

Nick is a security analyst in an investment banking firm. His supervisor asked him to evaluate a preferred stock. The par value of the preferred stock is 100 and it pays an annual dividend of5.30 per share. Answer the following questions on the basis that the market required return is 7

Answer 1

To calculate the price per share of the preferred stock, use the concept of present discounted value (PDV) and follow the steps provided. The price per share should be about $256,500 per share.

Step-by-step explanation:

To calculate the price per share of a preferred stock, we can use the concept of present discounted value (PDV). It helps determine the amount you should be willing to pay in the present for a stream of expected future payments. In this case, we have a preferred stock with a par value of $100 and an annual dividend of $5.30 per share. Given a market required return of 7%, we can calculate the price per share using the following steps:

1. Calculate the present value of each expected future dividend payment using the formula: PV = Dividend / (1 + Interest Rate)^Time Period.
2. Add up all the present values of the dividend payments over different time periods to get a total present value.
3. Divide the total present value by the number of shares to get the price per share.

Using this formula, the price per share of the preferred stock should be about $256,500 per share.