1. You have 200 shares of preferred stock in Phantom Casino, Inc. The stock pays

Question

1. You have 200 shares of preferred stock in Phantom Casino, Inc. The stock pays $60 per share as dividend in perpetuity and the current interest rate is 5.25%. What is the present value of the stock holding you have? (nice to have preferred stock) See your text in Chapter 1 on earnings in perpetuity, as PV (present value) = CF/r, for CF = cash flow, and r = interest rate . This is a present value of a perpetuity problem. PV = CF/r in a converging series. So set (60/0.0525)(200) =228,571 + for the present value of the preferred stock shares. Also make sure you understand value of firm with profit in perpetuity such as (profit)(1+ r)/(r

Explanation / Answer

pv of the stocks = divident/rate of interest pv = A/r for infinite time period a : annual payments r : rate of interest therefore pv of current holdingss = 200*60/.0525 = 228571$

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