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

jeff jeffy answered 1 year ago

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