Question

(Preferred stock valuation) Haney, Inc.'s preferred stock is selling for $23. 25 per share in the market and pays a 53 25 annual dividend a. What is the expected rate of return on the stock? b. If an investor's required rate of return is 12 percent, what is the value of the stock for that investor? c. Should the investor acquire the stock? a. The expected rate of return on the stock is %. (Round to two decimal places.) b. If an investor's required rate of return is 12 percent, the value of the stock for that investor is (Round to the nearest cent.) c. Because the expected rate of return is the investor's required rate of return or because the current market price is Inc.'s preferred stock is and the investor should the stock. (Select from the drop-down menus.) $27.08, the Haney.

Answer 1

a). Return = Annual Dividend / Current Market Price

= $3.25 / $23.25 = 0.1398, or 13.98%

b). Value of the Stock = Annual Dividend / Required Return = $3.25 / 0.12 = 27.08

c). The investor acquire the stock, as the expected return is more than the required rate, or the current market price is less than the value of the stock, which means the preferred stock is undervalued.