Jones Design wishes to estimate the value of its outstanding preferred stock. Th
ID: 2760824 • Letter: J
Question
Jones Design wishes to estimate the value of its outstanding preferred stock. The preferrred issue has a par value of $90 and pays an annual dividend of $5.50 per share. Similar risk-preferred stocks are currently earning an annual rate of return of 8.3%
A.) The market value of the outstanding preferred stock is $? per share
B.) If the requred return on the similar-risk preferred stocks has risen to 9.4% the value of the stock will be $?
C.) If an investor purchased the prefered stock at the value calculated in part a and sells the stock when the required return on the similiar risk preferred stocks has risen to 9.4% the gain or loss is $? per share.
Explanation / Answer
A.) The market value of the outstanding preferred stock is $? per share
Market Value of Preferred Stock
= Dividend/Required Return
= 5.5/8.3%
= $66.26
B.) If the requred return on the similar-risk preferred stocks has risen to 9.4% the value of the stock will be $?
Market Value of Preferred Stock
= Dividend/Required Return
= 5.5/9.4%
=58.51
C.) If an investor purchased the prefered stock at the value calculated in part a and sells the stock when the required return on the similiar risk preferred stocks has risen to 9.4% the gain or loss is $? per share.
Answer : Loss of $ 7.76
working notes for the above answer is as under
Particular Amount in $ Purchases at a price of (a) 66.27 Less: Sales at price og (b) -58.51 Net Loss -7.76Related Questions
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