Equity Investments Q231

231A 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:

Option : A
Explanation : 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.

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