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Question of the Week – Equity

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    • Avatar of AdaptPrepAdaptPrep
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        • Undecided
        15 Sep 2018 at 7:35 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
      • Avatar of Stuj79Stuj79
        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

        • Avatar of googs1484googs1484
          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

          • Avatar of AdaptPrepAdaptPrep
            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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