d: Calculate the intrinsic value of a non-callable, non-convertible preferred stock.

Question 1

Calculate Value of Preferred Stock using DDM (Dividend Discount Model : simplified version constant growth)

Answer 1

A perpetuity (no maturity) • Dividend remains constant (percentage of par value) – Growth of dividend is 0% (i.e., g = 0%) • Value (V) = Dividend (D) / Required rate of return (k) • V = D / k – Discounting (discount rate is “k”, aka the required rate of return) a dividend – (Can also calculate yield (i.e., required rate of return, k) if you know price: k = Dividend/V) Preferred stock typically pays a fixed dividend and does not mature. It is valued as:

Preferred stock most likely has a:

fixed dividend and no maturity. Preferred stock typically pays a fixed dividend and does not mature.

Question 2

Calculate the intrinsic value of a non‐callable, nonconvertible preferred stock

Answer 2

• Par value = $100 • Dividend = $8.00 • Discount rate = 10% • V = D / k • V = $8.00 / 10% • V = $80.00 • What factors affect the choice of discount rate? – Discount rate in this context refers to a shareholders required market rate of return based on returns provided for similar risk investments. – Insights as to whether the dividend rate equals the market rate? Was stock sold at a discount/premium to par value at issuance? – Has risk of receipt of dividend payments changed?