LOS h: Calculate the value of noncallable fixed-rate perpetual preferred stock given the stock's annual dividend and the discount rate.

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.

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.

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%.

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.

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

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