Equity Investments MCQ - Equity Investments Section 2

81 A company’s 6% preferred stock has the following features: Par value of $100 and pays quarterly dividends. Current market value $80. The shares are retractable (at par) with the retraction date set for three years from today. Similarly rated preferred issues have an estimated nominal required rate of return of 15%. Analysts expect a sustainable growth rate of 5% for the company’s earnings. The intrinsic value estimate of a share of this preferred issue is closest to:

Quarterly dividend = ($100 * 0.06) / 4 = $1.5 a share; Quarterly required return = 15% / 4 = 3.75% Compute PV using a financial calculator: PMT = $1.5; N = 12; FV = $100; I = 3.75%; CPT PV = $78.57.

82 An Australian bank has an issue of 3.2%, AUD 50 par value, perpetual preferred shares outstanding. The required rate of return on a similar issue is 6.02%. The intrinsic value of the preferred share is closest to:

Dividend = 3.2% of 50 = 1.6 Intrinsic value = 1.6 / 0.0602 = 26.58.

83 The present value of a non-callable, perpetual, preferred share is 117.6. What will an investor be willing to pay for another preferred share which is similar in all respects except it is callable?

The investor will pay less for this share because of the risk that it might be called by the issuer.

84 The following data is available for a company: Par value of preferred stock offered at a 6% dividend rate: $100 Company's sustainable growth rate: 3% Yield on comparable preferred stock issues: 9.5% Investor's marginal tax rate: 40% The value of the company's preferred stock is closest to:

85 Given that the value of the preferred stock of a company is $56, which of the following is most likely to be the dividend rate for the stock? Assume par value of stock to be $100, tax rate to be 35%, sustainable growth rate to be 5% and required rate of return of 13.4%.