Pan Am Airlines issued emergency preferred shares after its reorganization.The preferred share has a fixed dividend of $1 payable at the end of each of the next three years.At the end of the three years it matures and pays its par value.The par value is equal to the value of the common shares at that time.The common shares are currently trading for $37.08.They pay no dividends currently,but are forecast to begin paying a dividend in four years at $3.55 per share.The dividend is expected to grow at 4% in perpetuity and common shareholders expect a return of 11%.What is the fair market value for the preferred shares today if the preferred shareholders require a 9% rate of return?

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Step 1 - Calculate the present value of the preferred dividends. PV = 11ea7fdb_fbec_b1fd_a768_dd4adc78d2a1_TB2902_11 = $.9174 PV = 11ea7fdb_fbec_b1fe_a768_312de34cc6b8_TB2902_11 = $.8417 PV = 11ea7fdb_fbec_d90f_a768_93bcd5bd3c7e_TB2902_11 = $.7722 Step 2 - Add these cash flows together. .9174 + .8417 + .7722 = $2.53. Step 3 - Calculate the value of the common stock in three years and discount it back to today. P₀ = 11ea7fdb_fbec_d910_a768_ad309a237b87_TB2902_11 P₀ = 11ea7fdb_fbec_d911_a768_a9c741f409f2_TB2902_11 = 50.71 PV = 11ea7fdb_fbec_d912_a768_dba4ac3e6e1a_TB2902_11 PV = 11ea7fdb_fbec_d913_a768_8f1804d23e20_TB2902_11 = $39.16 Step 4 - Add all the present values together 2.53 + 39.16 = $41.69

Pan Am Airlines Issued Emergency Preferred Shares After Its Reorganization