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You are provided with the following information on a noncallable, nonconvertible preferred stock:
The intrinsic value of this stock is closest to:
Comments
Surely the formula is Value = Dividend / Required Rate of Return
£6.35 / 0.0875 = 72.57
Sorry, the answer is 75, not 65. I didn't realize I clicked on the wrong answer choice. Here's the solution:
The formula for a noncallable, nonconvertible, perpetual preferred stock is:
V_0 = D_1 / r = £6.35 / 0.0875 = £72.57