1-share\'s current value 2-asha is 3-less/more The formula for the valuation of
ID: 2745000 • Letter: 1
Question
1-share's current value
2-asha is
3-less/more
The formula for the valuation of a share of preferred stock is P_0 = D_p/k_p. In this equation, the variable P_0 represents the Asha is considering the purchase of 500 shares of the preferred stock of Edinburgh Exports Inc. The stock carries a par value of $100 per share and an annual dividend rate of 9.75%. Alternative investments of comparable risk are generating yields of 4.00%. Given this information, the per-share value of Edinburgh's preferred stock should be: $219.38 $182.81 $304.69 $243.75 Asha has to postpone her purchase of Edinburgh's preferred shares for just over four months. By the time she is ready to invest, the return on alternative investments of comparable risk has increased. She should expect the cost of her investment in Edinburgh's preferred shares to be expensive. Assume that Asha delays her investment for another few months, and that when she is finally ready to make her 500-share investment in Edinburgh, the market price of Edinburgh's preferred stock has changed to $329.06 per share. If she pays this price to acquire each share of Edinburgh's preferred stock, what rate of return will Asha earn on her investment? Remember that the shares have a par value of $100 and a dividend rate of 9.75%. 2.96% 2.81% 2.37% 3.85%Explanation / Answer
/olution 1
Here the variable P0 denotes the current value of preferred stock.
Solution 2
Annual Dividend Dp= Par value x dividend rate
= 100 x9.75%
= 9.75
Kp = 4%
Po = Dp/ Kp
= 9.75/0.04
= 243.75
So value of the preferred stock would be 243.75.
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