Jones Design wishes to estimate the value of its outstanding preferred stock. Th
ID: 2739459 • Letter: J
Question
Jones Design wishes to estimate the value of its outstanding preferred stock. The preferred issue has a par value of
$70 and pays an annual dividend of $5.60 per share. Similar-risk preferred stocks are currently earning an annual rate of return of 8.7%.
a.What is the market value of the outstanding preferred stock?
b.If an investor purchased the preferred stock at the value calculated in part
a,how much does she gain or lose per share if she sells the stock when the required return on similar-risk preferred stocks has risen to 9.8%?
Explanation / Answer
If market rate of return is 9.8%, the market value of bond is
= Dividend/ke
= 5.6/9.8%
= 57.14
if he purchase the stock at 64.36 then he will incurr loss of 7.22
Market value of preferred stock =Annual dividend/rate of return =5.6/8.7% 64.36781609Related Questions
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