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If investors require a 10% annual return on a 15% preferred stock with a par value of $195, which of the following falls closest to where the stock's price should be?


Select a Choice Below


current question choices


OptionA


$130


OptionB


$200


OptionC


$300


OptionD


$700

Answer :

The stock's price should be closest to 300. This is calculated by dividing the dividend (29.25) by the required annual return (10%) to determine the present value of the stock. Among the given options, Option C (300) falls closest.

To determine the price of the stock, we need to calculate the dividend that the investors would receive and then discount it to present value using the required annual return.
The dividend for the preferred stock is calculated as a percentage of the par value. In this case, the dividend would be 15% of the 195 par value, which is 29.25.
To find the price of the stock, we need to discount the dividend to present value using the required annual return of 10%. We can use the formula: Stock Price = Dividend / Required Annual Return.

Using this formula, we can calculate the price as follows:
Stock Price = 29.25 / 0.10
Stock Price = 292.50
Therefore, the stock's price should be closest to 300. Among the given options, Option C (300) falls closest to the calculated price.

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