# Growth and value of stock

XYZ Corporation is planning to issue 5 million shares of preferred stock. These shares will pay a perpetual dividend of \$5.00 per share. The current risk-free rate of interest is 3.33% and XYZ is able to issue new bonds at a 10% yield-to-maturity. XYZ is a high-quality company and preferred stocks of similar quality companies are yielding 5%. The per share value of XYZ Corporation’s preferred stock is: a. \$5.00 b. \$100.00 c. \$150.00 d. \$300.00

(b) \$100 =\$5 / 0.05

its 5/.10

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Can you do it using the price formula? Use P=D/(K-g)

You don’t need p = d/k-g you have preferred. so just do preferred dividend/YTM

pepp Wrote: ------------------------------------------------------- > its 5/.10 That’s what I thought, but that’s not a choice…(\$50)

Here we have to use the bond yield plus risk premium approach: Rce= Rd - Rerp= 0.1 - (0.05)=0.05 Rm=DIV/P 5%= 5/P solve for P P=100

I don’t understand how its a high quality company, other people are able to raise debt cheaper!! wtf is this question?

preferred stock can be commonly valued using the perpetuity formula = payment/discount the key here is the “perpetual dividend of \$5…” and recognizing the market will discount the forward payments with the “appropriate” discount rate… which is this case is merely a reference to industry peers

pepp Wrote: ------------------------------------------------------- > I don’t understand how its a high quality company, > other people are able to raise debt cheaper!! wtf > is this question? pepp, take a chill pill dude… this is preferred stock NOT debt

> I don’t understand how its a high quality company, other people are able to raise debt cheaper!! wtf is this question? I agree, while bonds are selling for 3.33%, this company is paying 10%.

Dreary Wrote: ------------------------------------------------------- > > I don’t understand how its a high quality > company, other people are able to raise debt > cheaper!! wtf is this question? > > I agree, while bonds are selling for 3.33%, this > company is paying 10%. Credit crunch effect

Dreary Wrote: ------------------------------------------------------- > > I don’t understand how its a high quality > company, other people are able to raise debt > cheaper!! wtf is this question? > > I agree, while bonds are selling for 3.33%, this > company is paying 10%. treasuries are at 3.33%, that doesn’t mean anything for credit spreads. Spreads can be wide enough that investment-grade rated corporate debt trades at those levels and then some…

Yes, those who said use the perpetuity method are correc, and that was the answer given, but I wanted to see if the other formula holds, which it should (strangedays had the right idea): P=D/(K-g) D=\$5.00 K is the cost of peferred equity, which is 5%, g=0, since the dividend doesn’t grow.

Char lee, have you ever seen a spread that big for high quality companies?

Char-Lee Wrote: ------------------------------------------------------- > Dreary Wrote: > -------------------------------------------------- > ----- > > > I don’t understand how its a high quality > > company, other people are able to raise debt > > cheaper!! wtf is this question? > > > > I agree, while bonds are selling for 3.33%, > this > > company is paying 10%. > > treasuries are at 3.33%, that doesn’t mean > anything for credit spreads. Spreads can be wide > enough that investment-grade rated corporate debt > trades at those levels and then some… Man chill out…I was joking!

delta9, > That’s what I thought, but that’s not a choice…(\$50) I took that choice out and replaced it with \$300.

strangedays Wrote: ------------------------------------------------------- > Char-Lee Wrote: > -------------------------------------------------- > ----- > > Dreary Wrote: > > > -------------------------------------------------- > > > ----- > > > > I don’t understand how its a high quality > > > company, other people are able to raise debt > > > cheaper!! wtf is this question? > > > > > > I agree, while bonds are selling for 3.33%, > > this > > > company is paying 10%. > > > > treasuries are at 3.33%, that doesn’t mean > > anything for credit spreads. Spreads can be > wide > > enough that investment-grade rated corporate > debt > > trades at those levels and then some… > > > Man chill out…I was joking! ??? i think you’re confused… your post wasn’t even up when i wrote my reply…

I know only one formula to value the price or the return or whatever on a preferred stock, and that’s the Dividend/Price=yield. I don’t know what are you talking about D/(ke-g) for preferred stock:)