Question

Companies that have preferred stock outstanding promise to pay a stated dividend for an infinite period. Preferred stock is treated like a perpetuity if the payments last forever. Preferred stocks are considered to be a hybrid of a common stock and a bond. For example, one of the major differences between preferred shares and bonds is that the issuing companies can suspend the payment of their preferred dividends without throwing the company into bankruptcy. However, similar to bonds, preferred stockholders receive a fixed payment—their dividend—before the company’s residual earnings are paid out to its common stockholders and, as with common stock, preferred stockholders can benefit from an appreciation in the value of the firm’s stock securities. Consider the following case of Marston Manufacturing Company: Marston Manufacturing Company pays an annual dividend rate of 11.00% on its preferred stock that currently returns 14.74% and has a par value of $100.00 per share. What is the value of Marston’s preferred stock? $100.00 per share $89.56 per share $74.63 per share $111.94 per share

Answer 1

The value of Marston's preferred stock is $74.63 per share.

Step-by-step explanation:

To determine the value of Marston's preferred stock, we can use the concept of present discounted value (PDV). The PDV is the amount you should be willing to pay in the present for a stream of expected future payments. In this case, the expected future payments are the annual dividends. The formula to calculate the value of preferred stock is: Value of preferred stock = Dividend / Return rate

Given that Marston Manufacturing Company pays an annual dividend rate of 11.00%, the dividend is $11 ($100 * 11.00%). The return rate on the preferred stock is 14.74%. Plugging these values into the formula, we get: Value of preferred stock = $11 / 14.74% = $74.63 per share.

Answer 2

$74.63 per share

Step-by-step explanation:

The computation of the value of preferred stock is shown below:

As we know that

Value of the preferred stock = Annual dividend rate ÷ Returns on the stock

where,

Dividend on the preferred stock = Dividend rate × Par value

= 11% × $100

= $11

And, the return is 14.74%

So, the value of the preferred stock is

= $11 ÷ 14.74%

= $74.63 per share