Question

Some of the local licensed stockbrokers offer investors the opportunity to invest in

Answer 1

Currently, $17.39 is the price that investors are willing to pay for a share of this stock. Currently, $18.75 is the price that investors are prepared to pay for a share of this stock.

What is  preference shares?

Shares with the ability to receive dividends announced by the firm before equity shareholders are referred to as preference shares, or preferred shares. A security with a fixed income is preferred shares.

Annual rate after year 4(g) =2%

required rate (r) = 9%

Terminal value = Dividend year 4 × (1 + g) / (r—g)

1.25000 ×  1 + 0.02/0.09 – 0.02

= 18.21429

(i) D1/(1+r)  + $D1/(1+r)^{2}$ + $D1/(1+r)^{3}$$D1/(1+r)^{4}$ + terminal value/$(1+r)^{4}$

1.50/(1+9%) + 1.50/$(1 + 0.09)^{2}$ + 1.25/$(1+0.09)^{3}$ + 1.25/$(1+0.09)^{4}$ + 18.21429/ $(1+0.09)^{4}$

= 17.39289

(ii) Annual dividend/r

1.50/8%

=18.75

Hence, the significance of the preference shares is aforementioned.

Learn more about on preference shares, here:

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