I have a question about one of the solutions in Equity Asset Valuation Second Ed

Question

I have a question about one of the solutions in Equity Asset Valuation Second Edition. For Chapter 3, question 5 the solution uses the cumulative perpeutal preferred stock percent of 4.5 for the dividend. However a similar example in the book multiplies the percentage by the par value of the preferred stock to get the dividend.

So should it be 4.5% x 100 (par value of preferred stock) = 4.5 dividend. And then 4.5/.056 (.056 is the required rate of return) = 80.36 for the value of the company.

or like the solution says .045/.056 =.8036 for the value of the company.

Thanks.

Explanation / Answer

Preferred stock Dividend is calculated at face value = 4.5% of 100 = $4.5

Now required rate of return is 5.6% so value of one perpetual preferred stock = 4.5/0.056 = $80.36

Hence the correct way of presenting the answer is the first one that you have mentioned.

However this is not the value of the company , this is just the value of one perpetual preferred stock of $100 par value

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