Question

You own 100 shares a $50 par value preferred stock. The stock has a 12% dividend rate, and a current market price of $85 per share. Since interest rates have dropped, you expect the company to continue to pay dividends until the call protection period expires five years from now. At that time, you think the company will call the stock for $50 per share. Your required rate of return on the stock is 8%. What is the value of your stock if the company calls the stock after five years? a. 58 b. 50 c. 85 d.82 e.92

Answer 1

Answer:

Option (a) is correct.

Explanation:

Value of stock:

= Present value of all cash flows

$=Dividend[\frac{1-\frac{1}{(1+r)^{n} } }{r}] + Par\ value[\frac{1}{(1+r)^{n} }]$

$=50\times 0.12[\frac{1-\frac{1}{(1.08)^{5} } }{0.08}] + 50[\frac{1}{(1.08)^{5} }]$

     = $6 × 3.9927 + $50 × 0.6806

     = $23.96 + $34.03

     = $57.99 or $58