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Mystery Ships Incorporated has preferred stock outstanding that pays a stated rate of 7
Mystery Ships Incorporated has preferred stock outstanding that pays a stated rate of 7.5 percent. Investors' required rate of return is seven percent.
a. What is the value of Mystery's' preferred stock?
b. Explain why the value is above (below) the par value.
Expert Solution
a. Computation of Value of Mystery's Preferred Stock:
Value of Preferred Stock = Annual Dividend/Required Rate of Return
Here,
Annual Dividend = Face Value*Stated Rate = $1,000 (assume)*7.5% = $75
Required Rate of Return = 7%
Value of Preferred Stock = $75/7% = $1,071.43
b. If the market price is higher than the par value than stock is trading at premium.
The value is above the par value because of required rate of return , If required rate of return keep on decreasing price of the stock keep on increasing and required rate of return will increase the price of stock will decrease.
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