Question

Conor Airlines Inc. recently issued $50 par value preferred stock that pays a 8.25% dividend rate per year. Yahoo.finance shows that the stock has a beta of 0.97. The current risk-free rate is 2.50% and the market return is 11%. Assuming that CAPM holds, what is the intrinsic value of this preferred stock?

Answer 1

Answer:

$38.29

Explanation:

Ke = Rf+Beta*(Rm-Rf)

Ke=0.0250+0.97*(0.11+0.0250)

Ke=0.10745

Ke=10.75 appr.

Po= Dividend / (Ke-g)

Po= 50*0.0825 / (0.10745 - 0)

Po=4.125/0.10745

Po=38.3899

Po=38.29

Thus, the intrinsiv value of this preferred stock is $38.29

Answer 2

Answer: $38.39

Explanation:

First calculate the required return according to CAPM;

Required return = Risk free rate + beta ( market return - risk free rate)

= 2.50% + 0.97 ( 11% - 2.50%)

= 10.745%

Then using the Dividend discount model and remembering that there is no growth rate;

Value = Next dividend / ( required return - growth rate)

= (50 * 8.25%) / ( 10.745% - 0)

= 4.125/10.745%

= $38.39