Question

International Imports (I2) pays an annual dividend rate of 10.20% on its preferred stock that currently returns 13.67% and has a par value of $100.00 per share. What is the value of I2’s preferred stock?

Answer 1

Answer:

The market price/value of the share of preferred stock is $74.62

Explanation:

The preferred stock pay 10.2% return on $100 per share which comes out to be 100 * 10.2% = $10.2. This dividend will remain constant no matter what the price in the market is. The price in the market is calculated by dividing the ineterest payment by the current price of the share. The formula for the current return of the preferred stock is:

0.1367 = 10.2 / P

P = 10.2 / 0.1367

P = $74.615 rounded off to $74.62