- CFA Exams
- CFA Level I Exam
- Topic 5. Equity Investments
- Learning Module 41. Equity Valuation: Concepts and Basic Tools
- Subject 4. Preferred Stock Valuation
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 |