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

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.

Question Of The Week - Equity (10) - CFA Level 1

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This topic has 4 replies, 4 voices, and was last updated Jan-183:23 am by RoyD.

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- AdaptPrep
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  08 Oct 2017 at 7:12 pm
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  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
- hairyfairy
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  08 Oct 2017 at 7:56 pm
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  @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…. 🙂
- AdaptPrep
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  09 Oct 2017 at 8:29 pm
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  @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
- shannondaily
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  25 Jan 2018 at 6:37 pm
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  Woo! I got it right. 🙂
- RoyD
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  26 Jan 2018 at 3:23 am
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  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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