Questions: Loretta Kennedy 10 Lab Quiz Question 10 of 20 This quiz: 40 point(s) possible This question: 2 point(s) possible (Preferred stock valuation) Kendra Corporation's preferred shares are trading for 17 in the market and pay a 3.30 annual dividend. Assume that the ma 17 percent a. What is the stock's value to you, the investor? b. Should you purchase the stock? a. The value of the stock to you, the investor, is per share. (Round to the nearest cent) b. Should you acquire the stock? (Select from the drop-down menus.) You acquire the stock because it is currently in the market.

Solution Steps

To determine the value of the preferred stock to an investor, we use the formula for the value of a preferred stock, which is the annual dividend divided by the required rate of return. If the calculated value is higher than the market price, the stock is undervalued, and it would be a good purchase. Conversely, if the calculated value is lower, the stock is overvalued.

To find the value of the preferred stock to the investor, we use the formula for the value of a preferred stock:

\[ \text{Value of Stock} = \frac{\text{Annual Dividend}}{\text{Required Rate of Return}} \]

Given:

• Annual Dividend = \$3.30
• Required Rate of Return = 17\% = 0.17

Substituting the values, we have:

\[ \text{Value of Stock} = \frac{3.30}{0.17} \approx 19.4118 \]

The market price of the stock is \$17.00. We compare this with the calculated value of the stock:

• Calculated Value of Stock = \$19.4118
• Market Price = \$17.00

Since the calculated value (\$19.4118) is greater than the market price (\$17.00), the stock is undervalued in the market.

Final Answer