CFA CFA Level 1 Question of the Week – Equity

Question of the Week – Equity

  • This topic has 3 replies, 3 voices, and was last updated Sep-18 by AdaptPrep.
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    • AdaptPrep
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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
    • Stuj79
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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
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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
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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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