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Sata Limited just issued some 12% preferred stock each having a par value of $ 1,000....
Sata Limited just issued some 12% preferred stock each having a par value of $ 1,000. The stock does not have any maturity and hence it will provide annual dividends for an infinite amount of time in the future. If the investors require an 8 percent return on the company's preferred stock, what should be the current price of the company's preferred stock?
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Expert Solution
Calculation of Current price of the company's preferred stock
Given:
Par Value Of Preferred Stock = $ 1000
Rate Of Dividend = R = 12%
Also, The Preferred Stock Does not have maturity , therefore it is ir-redeemable Preferred Stock.
So,
This can be solved using Geometric Progression (GP) Equation,
Hence, from the above equation,
solving the above equation,
Therefore,
[**Derivation through GP equation is given for understanding purpose only, This Formulae for finding P0 can be used directly in case of irredeemable Preferred stock]
[Where,
P0 = current price of the company's preferred stock
Kp = Investor's required rate of return = 8%
D = Annual Dividend amount = Par Value x R% = $ 1,000 x 12 % = $ 120]
P0 = $ 1,500
Therefore current price of the company's preferred stock = $ 1,500
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