QuestionWhat is the intrinsic value of Wayne's Steaks preferred stock at a 12% return if it pays 9% dividends and costs \$73?

Studdy Solution

STEP 1

Assumptions1. The par value of the preferred stock is $100. The dividend rate is9%<br />3. The market price per share is$ 734. Dividends are paid annually on December315. The required annual return on the investment is12%
6. The intrinsic value is the present value of all future dividends

STEP 2

First, we need to find the annual dividend amount. We can do this by multiplying the par value by the dividend rate.
$Dividend = Par\, value \\times Dividend\, rate$

STEP 3

Now, plug in the given values for the par value and dividend rate to calculate the dividend.
$Dividend = \$100 \\times9\%$

STEP 4

Convert the percentage to a decimal value.
$9\% =0.09$ $Dividend = \$100 \\times0.09$

STEP 5

Calculate the dividend amount.
$Dividend = \$100 \\times0.09 = \$9$

STEP 6

Now that we have the annual dividend, we can find the intrinsic value of the stock. This is the present value of all future dividends, which is calculated as the dividend divided by the required return.
$Intrinsic\, Value = Dividend / Required\, Return$

STEP 7

Plug in the values for the dividend and the required return to calculate the intrinsic value.
$Intrinsic\, Value = \$9 /12\%$

STEP 8

Convert the percentage to a decimal value.
$12\% =0.12$ $Intrinsic\, Value = \$ /0.12$

STEP 9

Calculate the intrinsic value of the stock.
$Intrinsic\, Value = \$9 /.12 = \$75$ The intrinsic value of the stock to you on January is $75 per share.

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