Question

(Preferred stock valuation​) You are considering an investment in one of two preferred​ stocks, TCF Capital or TAYC Capital Trust. TCF Capital pays an annual dividend of $2.16​, while TAYC Capital pays an annual dividend of $1.94. If your required return is 11​percent, what value would you assign to the​ stocks?
The value of the TCF Capital preferred stock is $______ per share

Answer 1

Answer:

Price of TCF Capital = $19.6363 rounded off to $19.64

Price of TAYC Capital = $17.6363 rounded off to $17.64

Explanation:

The value of current price of a preferred stock can be calculated using the formula for perpetuity. A preferred stock qualifies as perpetuity because its dividend payments are of a constant amount, are paid after equal intervals of time and are for an indefinite time period. The formula for price of the stock is as follows,

P0 = Dividend / r

Where,

r is the required rate of return

Price of TCF Capital = 2.16 / 0.11

Price of TCF Capital = $19.6363 rounded off to $19.64

Price of TAYC Capital = 1.94 / 0.11

Price of TAYC Capital = $17.6363 rounded off to $17.64