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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  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
- Stuj79
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  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
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  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
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  Sr Associate
  
  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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