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Solve: The Preferred Stock Valuation

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Scenario: Jones Design wishes to estimate the value of its outstanding preferred stock. The preferred stock issue has an $80 par value and pays an annual dividend of $6.40 per share. Similar risk preferred stocks are currently earning a 9.3% annual rate of return.

a) What is the market value of the outstanding preferred stock?

b) If an investor purchases the preferred stock at the value calculated in part a), how much does she gain or lose per share if she sells the stock when the required return on similar risk preferred has risen to 10.5%? explain.

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Solution Summary

The solution examines the preferred stock valuation.

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Question A:
To compute for the value of the stock, the formula is D/r where,
D = ...

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