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Jones Design wishes to estimate the value of its outstanding preferred stock. The preferred issue...

Question:

Jones Design wishes to estimate the value of its outstanding preferred stock. The preferred issue has a par value of $70 and pays an annual dividend of $5.60 per share. Similar-risk preferred stocks are currently earning an annual rate of return of 8.7%.

a.What is the market value of the outstanding preferred stock?

b.If an investor purchased the preferred stock at the value calculated in part a, how much does she gain or lose per share if she sells the stock when the required return on similar-risk preferred stocks has risen to 9.8%?

Preferred Stock Valuation:

Preferred stock is a class of ownership that provides priority claims to residual earnings relative to common shareholders. Dividends to preferred stocks are distributed before that of common stocks. The value of a share of preferred stock is equal to dividend per share divided by required rate of return on preferred stock.

Answer and Explanation:

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