Present value of preference share
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Assume that you would like to purchase 100 shares of preferred stock that pays an annual dividend of $6 per share. You have limited resources now, so you cannot afford the purchase price. The best that you can do now is to invest your money in a bank account earning a simple interest rate of 6%, but where interest is compounded daily (365 days). Because the preferred stock is riskier, it has a required annual rate of return of 12% and will remain constant over the next 5 year. To be able to purchase this stock at the end of 5 years, how much must you deposit in your bank account today, at t=0
2985.00
4291.23
3138.52
3704.18
4831.25
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Solution Summary
This explains the computation of present value of preference share.
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Money required at the end of 5 years (i.e. Future value)=$ 5,000 ...
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