Question

In: Finance

What’s value of a preferred stock if we assume it has a quarterly dividend $1.25 per...

What’s value of a preferred stock if we assume it has a quarterly dividend $1.25 per share and the required rate of return is 10%?

		$5
		$25
		$50
		$100

Other than dividend growth model, we can employ Market Multiple Analysis method for stock valuation. We suppose a firm's estimated earnings per share is $2. The average price to earnings (P/E) ratio for similarly publicly traded firms is 10. What's the firm's expected stock price?

		$25
		$20
		$22.5
		$27

Expert Solution

Solution:

Calculation of Value of preferred stock:

The formula for calculating the value of preferred stock is

= Annual Dividend of preferred stock / Required rate of Return

As per the information given in the question we have

Quarterly Dividend Per Share = $ 1.25 per share ;

Thus Annual Dividend Per share = $ 1.25 per share * 4 = $ 5 per share

Required rate of return = 10 % = 0.10

Applying the above values in the formula we have

= $ 5 / 0.10

= $ 50

The value of preferred stock is = $ 50

Thus the solution to the question is Option 3 = $ 50

Calculation of Expected Stock Price:

The formula for calculating the Price earnings ratio is

P / E Ratio = Expected stock price / Earnings per share

As per the information given in the question we have

Estimated Earnings per share = $ 2

Average Price to earnings ratio = $ 10

Applying the above values in the formula we have

10 = Expected Stock Price / 2

Expected stock price = 10 * 2

= 20

Thus the expected stock price = $ 20

The solution is option 2 = $ 20

jeff jeffy answered 1 year ago

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