A company's series B,8% preferred stock has the following features:
·A par value of $50 and 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:
B is correct. Because the current market value is well below the retraction price, retraction is likely and the preferred share will be priced on the basis of its retraction feature.
Quarterly dividend = (550 × 0.08) ÷ 4 = $1 a share;
Quarterly required return = 12% ÷ 4 = 3%
Vo = [51/1.03 + 1/1.032 + 1/1.033+……+1/1.0311+ 1/1.0312 + 50/1.0312] = $45.02
Using a financial calculator:
PMT = $1; N = 12; FV = $50; I = 3%; Compute PV =$45.02