LOS h: Calculate the value of noncallable fixed-rate perpetual preferred stock given the stock's annual dividend and the discount rate. fficeffice" />
Q1. What is the value of a fixed-rate perpetual preferred share (par value $100) with a dividend rate of 7.0% and a required return of 9.0%?
A) $78.
B) $71.
C) $56.
Correct answer is A)
The value of the preferred is $78:
V0 = ($100par × 7%) / 9% = $77.78
Q2. A $100 par, perpetual preferred share pays a fixed dividend of 5.0%. If the required rate of return is 6.5%, what is the current value of the shares?
A) $100.00.
B) $88.64.
C) $76.92.
Correct answer is C)
The current value of the shares is $76.92:
V0 = ($100 × 0.05) / 0.065 = $76.92
Q3. If the value of an 8%, fixed-rate, perpetual preferred share is $134, and the par value is $100, what is the required rate of return?
A) 8%.
B) 7%.
C) 6%.
Correct answer is C)
The required rate of return is 6%: V0 = ($100par × 8%) / r = $134, r = 5.97%
Q4. What is the value of a fixed-rate perpetual preferred share (par value $100) with a dividend rate of 11.0% and a required return of 7.5%?
A) $152.
B) $138.
C) $147.
Correct answer is C)
The value of the preferred is $147:
V0 = ($100par × 11%) / 7.5% = $146.67
|