Hello, can someone assist me with solving this and explain how you arrived to the answer. The “par value” concept is hard to get my hands around
ACME Industries pays an annual dividend of 9.8% on its preferred stock that currently returns 13.13% and has a par value of $100.
What is the value of ACME Industries stock ?
The par value and dividend rate give you the dollar dividend of 9.18. Then use the perpetuiry formula to get value = 9.18/0.1313 = 69.92
edited: oops - that should have been 9.80/0.1311 = 74.64
OK I think you meant 9.8 / 0.1313
I got the answer now, thank YOU. The Par Value concept was throwing me off, I suppose if that was left off the problem this still could have been solved.
No - without par value you can’t calculate the dividend. And without dividend, no valuation.
It may be easier to see if you break down the calculation into two steps:
- Calculate the dividend paid on the preferred stock: $100 × 9.8% = $9.80.
- Calculate the price of preferred stock for which $9.80 is 13.13% return:
Price × 13.13% = $9.80
Price = $9.80 ÷ 13.13% = $74.64.