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LOS c, (Part 1): Calculate and interpret the value of a preferred stock using the dividend discount model (DDM).ffice ffice" />
Q1. 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) $90.91.
C) $80.00.
Correct answer is B)
Preferred stock yield (Kp) = bond yield – 0.75% = 6.25% ? 0.75% = 5.5%
Value = dividend / Kp = $5 / 0.055 = $90.91.
Q2. Assuming a discount rate of 15%, a preferred stock with a perpetual dividend of $10 is valued at approximately:
A) $1.50.
B) $66.67.
C) $8.70.
Correct answer is B)
The formula for the value of preferred stock with a perpetual dividend is: D / kp, or 10.0 / 0.15 = $66.67.
Q3. 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.
Correct answer is B)
kpreferred = base yield + risk premium = 0.07 + 0.0075 = 0.00775
ValuePreferred = Dividend / kpreferred
Value = 5.50 / 0.0775 = $70.97
Q4. A company has 8 percent preferred stock outstanding with a par value of $100. The required return on the preferred is 5 percent. What is the value of the preferred stock?
A) $160.00.
B) $152.81.
C) $100.00.
Correct answer is A)
The annual dividend on the preferred is $100(.08) = $8.00. The value of the preferred is $8.00/0.05 = $160.00.
Q5. If a preferred stock that pays a $11.50 dividend is trading at $88.46, what is the market’s required rate of return for this security?
A) 13.00%.
B) 11.76%.
C) 7.69%.
Correct answer is A)
From the formula: ValuePreferred Stock = D / kp, we derive kp = D / ValuePreferred Stock = 11.50 / 88.46 = 0.1300, or 13.00%.
Q6. A company has 6 percent preferred stock outstanding with a par value of $100. The required return on the preferred is 8 percent. What is the value of the preferred stock?
A) $92.59.
B) $75.00.
C) $100.00.
Correct answer is B)
The annual dividend on the preferred is $100(.06) = $6.00. The value of the preferred is $6.00/0.08 = $75.00.
Q7. What is the value of a preferred stock that is expected to pay a $5.00 annual dividend per year forever if similar risk securities are now yielding 8 percent?
A) $62.50.
B) $40.00.
C) $60.00.
Correct answer is A)
$5.00/.08 = $62.50.
Q8. The preferred stock of the Delco Investments Company has a par value of $150 and a dividend of $11.50. A shareholder’s required return on this stock is 14%. What is the maximum price he would pay?
A) $150.00.
B) $82.14.
C) $54.76.
Correct answer is B)
Value of preferred = D / kp = $11.50 / 0.14 = $82.14
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发表于 2009-3-2 13:44
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