solution

Consider an example. Assume a share of preferred stock with the following characteristics:

Par value =$100

Dividend rate =4.5% per year

Payment schedule =semiannual

Maturity date

You are analyzing this preferred stock for possible purchase. Your required rate of return on this stock is 6% per year, compounded semiannually.

A. Draw a time line showing the expected dividends for this preferred stock.

B. Calculate the value of this preferred stock based on the required rate of return.

C. Assume that the current market price for this preferred stock is $71 per share. Calculate the expected return based on the market price.

D. Should you invest in the stock? Why or why not? Be sure to use your results from BOTH parts B and C above.

Solution:

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