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Up2
You are provided with the following information on a non-callable, non-convertible preferred stock:
- Face value: £65.00
- Annual dividend: £6.35
- Maturity: Perpetual
- Embedded options: None
- Required rate of return: 8.75%
The intrinsic value of this stock is closest to:
- £55
- £65
- £75
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Up5
Whenever the closest to is not close enough I begin doubting my answer. Since the option was $75 I thought the answer wouldn’t be less than $74. When I got 72.57 I recalculated it thinking it must be wrong coz it’s too far from $75. Luckily it’s a simple calculation. Hope it’s not like this in the exam.
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Up2
@PassedTense‌ can you vote in the right answer? That way as soon as we choose our answer we can see which is the right one rather than waiting a week…. 🙂
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Up2
Woo! I got it right. 🙂
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Up0
@hairyfairy‌ That’s a good point. I haven’t thought of that. I will do that going forward. Here’s the solution, by the way.
The formula for a non-callable, non-convertible, perpetual preferred stock is:
V0 = D1 / r = £6.35 / 0.0875 = £72.57
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