Question

The formula for the valuation of a share of preferred stock is Po = D/rs. In this equation, the variable Po represents the Genji is considering the purchase of 250 shares of the preferred stock of Harrington Imports Inc. The stock carries a par value of $100 per share and an annual dividend rate of 8.75%. Alternative investments of comparable risk are generating yields of 7.50%. Given this information, the per-share value of Harrington's preferred stock should be: $105.00 $145.84 O $87.50 O $116.67 Genji has to postpone her purchase of Harrington's preferred shares for just over three months. By the time she is ready to invest, the return on alternative investments of comparable risk has decreased. She should expect the cost of her investment in Harrington's preferred shares to be expensive. Assume that Genji delays her investment for another few months, and that when she is finally ready to make her 250-share investment in Harrington, the market price of Harrington's preferred stock has changed to $157.50 per share. If she pays this price to acquire each share of Harrington's preferred stock, what rate of return will Genji earn on her investment? Remember that the shares have a par value of $100 and a dividend rate of 8.75%. O 7.23% 55602

Answer 1

1.
Current price per share

2.
=Preferred Dividend/required return
=100*8.75%/7.50%
=116.6666667

3.
Less

4.
=Preferred Dividend/Price
=8.75%*100/157.50
=5.56%