Wernam Hogg Class A preferred shares have a par value of $100 and offer an annual dividend at 0.8% of par value.Wernham Hogg is experiencing cash flow problems due to poor market conditions in the commercial paper business.The company has suspended dividends on the Class A preferred shares.Analysts do not expect the dividends to resume for another 3 years,at which point they are expected to resume in perpetuity.If investors require a return of 2.25%,then what is the fair price for the preferred shares today?

Question

Quizplus · Accepted Answer

Step 1 - Solve for the price of the stock when it begins paying a dividend. 11ea7fdb_fbec_63d7_a768_cf5776404c78_TB2902_11 = 11ea7fdb_fbec_8ae8_a768_d145d4b71ad9_TB2902_11 11ea7fdb_fbec_8ae9_a768_bda92bc098f6_TB2902_11 = 11ea7fdb_fbec_8aea_a768_4d95f6528889_TB2902_11 = $35.56
Step 2 - Discount that stock price back to today.
PV = 11ea7fdb_fbec_8aeb_a768_f53fbc259a11_TB2902_11 PV = 11ea7fdb_fbec_8aec_a768_cb137d925a30_TB2902_11 = $34.01

Wernam Hogg Class a Preferred Shares Have a Par Value