CFA Practice Question

There are 497 practice questions for this topic.

CFA Practice Question

A company's $100 par perpetual preferred stock has a dividend rate of 7 percent and a required rate of return of 11 percent. The company's earnings are expected to grow at a constant rate of 3 percent per year. If the market price per share for the preferred stock is $75, the preferred stock is most appropriately described as being ______.
A. undervalued by $14.13
B. undervalued by $18.18
C. overvalued by $11.36
Explanation: Value of perpetual preferred stock = Dividend / Investor's required rate of return

$7/ 0.11 = $63.64

The stock is overvalued by $75.00 - 63.64 = $11.36.

User Contributed Comments 2

User Comment
satabbas Why do you not subtract the 3% growth rate?
ascruggs92 The preferred stock dividend of 7% is based on the par value of the share, $100. Because the par value does not change, the dividend payment does not change either. The 3% is just thrown in their to trick you
You need to log in first to add your comment.