Knowee
Questions
Features
Study Tools

What is the intrinsic value of a preference share that has been paying a semi-annual dividend of $1.0 per share, and has an equity cost of capital equal to 10.0% p.a. compounding annually? (Round your answer in dollars to 2 decimal places, e.g. put 1204.42 if your answer is 1204.4243.)

Question

What is the intrinsic value of a preference share that has been paying a semi-annual dividend of $1.0 per share, and has an equity cost of capital equal to 10.0% p.a. compounding annually? (Round your answer in dollars to 2 decimal places, e.g. put 1204.42 if your answer is 1204.4243.)

🧐 Not the exact question you are looking for?Go ask a question

Solution

The intrinsic value of a preference share can be calculated using the formula for the present value of a perpetuity. A perpetuity is a type of annuity that pays dividends indefinitely. The formula is:

Intrinsic Value = D / r

where: D = Dividend per period r = Discount rate per period

In this case, the dividend (D) is $1.0 per semi-annual period, and the discount rate (r) is 10.0% per annum. However, since the dividend is paid semi-annually, we need to adjust the discount rate to a semi-annual rate.

The semi-annual discount rate is (1 + annual rate)^(1/2) - 1, which is (1 + 0.10)^(1/2) - 1 = 0.0488 or 4.88%.

So, the intrinsic value of the preference share is:

Intrinsic Value = 1.0/0.0488=1.0 / 0.0488 = 20.49

So, the intrinsic value of the preference share is approximately $20.49.

This problem has been solved

Similar Questions

MercedesF1 currently has a dividend payout ratio of 100% which is expected to stay constant in perpetuity. MercedesF1's next year's dividend per share is expected to be equal to $12.20 and their cost of equity is equal to 12.00%. What is the intrinsic value of one share of stock equal to?Do not enter the $ sign in your answer.If you solve this problem with algebra, round any intermediate calculations to 6 decimal places.In all cases round your final answer to two decimal places, e.g. $8.723456, write 8.72

Assume Stanton Corporation will pay an annual dividend of $3.05 one year from now. Analysts expect this dividend to grow at 13% p.a. thereafter until the third year. After then, growth will level off at 3.4% p.a.. The firm’s equity cost of capital is 10.3% p.a.. What is the intrinsic value of Stanton Corporation? All of these rates are compounded annually. (Round your answer in dollars to 2 decimal places, e.g. put 1204.42 if your answer is 1204.4243.)

A company just paid an annual dividend of €1.25 per share. If the required annual rate of return is 14% and dividends are expected to grow indefinitely at a constant rate of 8%, the company’s intrinsic value per share is closest to:A.€16.88.B.€20.83.C.€22.50.

Purcell Corporation has preference shares with an annual dividend of $2.91. If the required return on​ Purcell's preference shares is 7.7%​, what is its​ price? ​(​Hint: For a preference​ share, the dividend growth rate is​ zero.)

Each quarter, A company pays a dividend on its perpetual preference shares. Today, the share is selling at $83.45(P0). If the required rate of return for such shares is 10.5%, what is the quarterly dividend paid by this company?

1/3

Upgrade your grade with Knowee

Get personalized homework help. Review tough concepts in more detail, or go deeper into your topic by exploring other relevant questions.