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

How is @AdaptPrep getting £65 for this?Surely the formula is Value = Dividend / Required Rate of Return£6.35 / 0.0875 = 72.57

I was saying same thing last night when I answered this. Absolutely is 75. If we don't know GGM and/or all derivations of it by now then might as well quit haha

Question Of The Week - Equity (2) - CFA Level 1

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This topic has 3 replies, 3 voices, and was last updated Sep-187:31 am by AdaptPrep.

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- Stuj79
  Participant
  - CFA Charterholder
  17 Sep 2018 at 9:00 am
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  How is @AdaptPrep getting £65 for this?
  
  Surely the formula is Value = Dividend / Required Rate of Return
  
  £6.35 / 0.0875 = 72.57
- googs1484
  Participant
  - CFA Level 3
  17 Sep 2018 at 1:09 pm
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  I was saying same thing last night when I answered this. Absolutely is 75. If we don’t know GGM and/or all derivations of it by now then might as well quit haha
- AdaptPrep
  Participant
  - Undecided
  19 Sep 2018 at 7:31 am
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  ::
  Sorry, the answer is 75, not 65. I didn’t realize I clicked on the wrong answer choice. Here’s the solution:
  
  The formula for a
  non-callable, non-convertible, perpetual preferred stock is:
  
  V_0 = D_1 / r = £6.35 / 0.0875 = £72.57
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