Equity Investments Q230

0. Information on a non-callable, non-convertible preferred stock is given below:
Par value per share: $20
Annual dividend per share: $1
Maturity: 10 years
Assuming the required rate of return is 8% and the current market price per share of the preferred stock is $17, the most likely conclusion is that the preferred stock is:

Answer
Comment
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Option : A
Explanation : Using a financial calculator, calculate the present value as: FV = $20; N = 10; PMT = 1; I/Y = 8%; CPT PV = $15.97 Since the intrinsic value is less than the current market price, the preferred stock is overvalued.

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