Preference share valuation: The National Bank of Columbia has issued perpetual preference shares with a $100 par value

Accounting Jan 21, 2021

Preference share valuation: The National Bank of Columbia has issued perpetual preference shares with a $100 par value. The bank pays a quarterly dividend of $1.40 on this share. What is the current price of this preference share given a required rate of return of 8.5 percent?
a. $23.06 *b. $65.88 c. $37.57 d. $43.25

Expert Solution

Computation of Current Price of Preference Share:

Current Price of Preference Share = Annual Dividend/Required Rate of Return

Here,

Annual Dividend = 1.4*4 = $5.6

Required Rate of Return = 8.5%

Current Price of Preference Share = $5.6/8.5% = $65.88

The correct option is B.

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