 # Equity Valuation 1

A company’s series B, 8% preferred stock has the following features:

• A par value of \$50, and it pays quarterly dividends.
• Its current market value is \$35.
• 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 12%.
• Analysts expect a sustainable growth rate of 4% for the company’s earnings.

The intrinsic value estimate of a share of this preferred issue is closest to:

1. \$33.33.
2. \$45.02.
3. \$52.00.

My Understanding
D1 = 50* .08=4/4=1
r = .12/4= .03
V0 = 1/.03= 33.3

What am I skipping?

Hi, personally my answer would be:

Div. of 8% * \$50 for 3 more years (shares are retractable at par) plus the par value in 3 years, discounted at the required rate of return.
Since divs are constant it is not a perpetuity, no need for the growth rate.

So. P0 = (4/1.12) + (4/1.12^2) + ((50+4)/1.12^3)) = \$45.20

Hope this helps!

2 Likes

Greetings, here is how you get 45.02 on your financial calculator:

FV = 50
PMT = 1
I = 3
N = 12
[Compute] PV = 45.02

FV = par retractable value = 50
PMT = quarterly dividend = (50*0.08)/4 = 1
I = 12% required return divided by 4 to make it quarterly = 3
N = 12 quarters

This gives you PV = \$45.02 … without over complicating things, just think of intrinsic value of preferred stock as the present values of its cash flows. Here the cash flows are the 1 dollar quarterly dividends plus the 50 dollar payment when the retraction happens in 3 years. The discount rate is the required rate of return for such stock. They gave it all to you here but threw in some extra stuff to try to distract you.

Cheers - good luck - you got this 1 Like