Ontario Transportation Inc.has issued $2.5 million in preferred shares with a par value of $25 each and an annual dividend rate of 10.0%.The market value of the preferred shares is ____________ if the required rate of return is 8.0%.

Question

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The market value of the preferred shares is calculated using the formula for the value of a perpetuity: Market Value = Annual Dividend / Required Rate of Return. The annual dividend per share is 10% of the $25 par value, which is $2.5. With a required rate of return of 8%, the market value per share is $2.5 / 0.08 = $31.25. Since there are $2.5 million / $25 = 100,000 shares, the total market value is 100,000 shares * $31.25 = $3,125,000.