Question

Question 7-8

Preference share valuation – Jones Design wishes to estimate the value of its issued

Preference shares. The preference issue has an R80par value and pays an annual dividend of

R6.40 per share. Similar risk preference shares are currently earning a 9.3% anual rate of return.

a)What is the market value of the issued preference shares?

b)If an investor purchases the preference shares at the value calculated in part a, how much does she gain or lose per share

c)If she sells the shares when the required return on similar risk preferences has risen to 10,5%. Explain

Answer 1

a)Market value of the issued preference shares is computed as:

Market value of preferred stock=Dividend/Required return

Market value of preferred stock=6.40/9.3%
Market value of preferred stock=$68.82

b)If the required return is 10.5%
Market value of the securities=6.5/10.5%
Market value of the securities=$60.95

If the shares are sold then loss of $7.87 ($68.82-$60.95) would be incurred by Jones Design.