Question

ZZZ-Best, Inc. recently issued $65 par value preferred stock that pays an annual dividend of $17. If the stock is currently selling for $76, what is the expected return of this preferred stock? 22.37% 22.94% 0 24.42% O 20.27% O 22.60%

Answer 1

1. Expected Return =Dividend/Current Price =17/76 =22.37% (Option a is correct option)

2. Intrinsic Value of The stock =Dividend*(1+g)/(Required Rate-growth) =5*(1+3.1%)/(19.5%-3.1%) =31.43 (Option a is correct option)

3. growth =ROE*(1-Dividend Pay out Ratio)=15%*(1-50%) =7.5%
Cost of Equity=Risk free Rate+beta*(Market Return-Risk free rate) =2%+1.01*(11%-2%) =11.09%
Intrinsic Value of Stock =D0*(1+g)/(Cost of equity-growth)
=18*(1+7.5%)/(11.09%-7.5%) =538.99 or 539