CFA CFA Level 1 Question of the Week – Equity

Question of the Week – Equity

  • This topic has 4 replies, 4 voices, and was last updated Jan-18 by RoyD.
  • Author
    Posts
    • AdaptPrep
      Participant
      Up
      1
      Down

      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
      Participant
      Up
      2
      Down

      @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
      Participant
      Up
      0
      Down

      @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
      Participant
      Up
      2
      Down

      Woo! I got it right. 🙂 

    • RoyD
      Participant
      Up
      4
      Down

      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.

Viewing 4 reply threads
  • You must be logged in to reply to this topic.