Saturday, April 19, 2008

Calculate Preferred Stock Value

Preferred Stock Example Problem:

A yacht manufacturing company has issued perpetual preferred stock outstanding with a par value of $100 per share and a dividend yield of 8.8% of its stated value. If the appropriate interest rate for the company's preferred stock is 8.3%, how much is each share of preferred stock worth?

Calculate Cost of Preferred Stock Shares:

The company has perpetual preferred stock, so it pays a constant dividend forever. The preferred stock pays a dividend that is 8.804 of stated value.

Therefore, the constant dividend equals $100 x 0.088 = $8.80.

The value of perpetual preferred stock is the dividend payment divided by the required return, which in this case is given by the "appropriate interest rate."

P = D / R
= $8.80 / 0.083
= $106.0241, or $106.02

Each Share of Perpetual Preferred Stock is valued at $106.02

Additional Help:
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