18. North Park International LLC has issued preferred stock ($65 par value) that

Question

18. North Park International LLC has issued preferred stock ($65 par value) that pays an annual dividend of $5.80. The preferred stock matures in 20 years. At that time, holders of the stock will receive, at their option, either $65 or one share of common stock with a value up to $90. If the common stock is trading at a price above $90, the preferred stockholders will receive a fractional share of common stock worth $90. The current common stock pays a $1.5 per share dividend. This dividend is expected to grow at a 3 percent rate per year for the next 20 years. If the market requires a 24% rate of return on a stock of this risk and maturity, what is the maximum value for which the share can be expected to trade?

                A. $25.06

                B. $136.12

                C. $23.84

                D. $24.72

Explanation / Answer

The current common stock pays a dividend of $3.15 per share dividend and is expected to grow at a 3% rate per year for the next year. This data is insufficient to estimate the common stock's calue after 20 years.

Maximum value of prefered stock would be when shareholder receive $90 at maturity.
PMT= Coupons/ Dividends = 5.80
FV = Future value = 90
N= Time to maturity = 20
I/Y = Required return = 24%

Feeding these values in financial calculator, and solving for PV we get
PV = 25.06
The maximum value for which the share can be expected to trade is $25.06

Hence the correct answer is A

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