Homework Answers
Dividend = $8.50
Par value of each preferred share = $100
Annual coupon rate = 8.5 / 100 = 8.5%
Investor require a 12.25% rate of return
Current Market Price = Annual Preferred Dividend / Required rate of return
Current Market Price = $8.50 / 0.1225
Current Market Price = $69.39.
Current market price is less than the Par value. It is evident because coupon rate is lower than the Required return, so investor would get more return if he had invested in Market. Since he is getting lower return the price will be lower than the par value
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