Reading 60: An Introduction to Security Valuation: Part II annual, market, current, class

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6.Calculate the value of a preferred stock that pays an annual dividend of $5.50 if the current market yield on AAA rated preferred stock is 75 basis points above the current T-Bond rate of 7%.

A)   $42.63.

B)   $70.97.

C)   $78.57.

D)   $88.00.

7.Assuming a discount rate of 15%, a preferred stock with a perpetual dividend of $10 is valued at approximately:

A)   $8.70.

B)   $150.00.

C)   $66.67.

D)   $1.50.

8.A preferred stock’s dividend is $5 and the firm’s bonds currently yield 6.25%. The preferred shares are priced to yield 75 basis points below the bond yield. The price of the preferred is closest to:

A)   $5.00.

B)   $80.00.

C)   $90.91.

D)   $100.00.

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答案和详解如下：

6.Calculate the value of a preferred stock that pays an annual dividend of $5.50 if the current market yield on AAA rated preferred stock is 75 basis points above the current T-Bond rate of 7%.

A)   $42.63.

B)   $70.97.

C)   $78.57.

D)   $88.00.

The correct answer was B)

k_preferred = base yield + risk premium = 0.07 + 0.0075 = .00775

Value_Preferred = Dividend/k_preferred

Value = 5.50/0.0775 = $70.97

7.Assuming a discount rate of 15%, a preferred stock with a perpetual dividend of $10 is valued at approximately:

A)   $8.70.

B)   $150.00.

C)   $66.67.

D)   $1.50.

The correct answer was C)

The formula for the value of preferred stock with a perpetual dividend is: D / kp, or 10.0 / 0.15 = $66.67.

8.A preferred stock’s dividend is $5 and the firm’s bonds currently yield 6.25%. The preferred shares are priced to yield 75 basis points below the bond yield. The price of the preferred is closest to:

A)   $5.00.

B)   $80.00.

C)   $90.91.

D)   $100.00.

The correct answer was C)

Preferred stock yield (K_p) = bond yield – 0.75% = 6.25% - 0.75% = 5.5%

Value = dividend / K_p = $5 / 0.055 = $90.91.