Montreal Growers Inc.issued 1 million preferred shares at a stated value of $20 and the dividend rate is 10%.If the risk-free rate is 4% and the risk premium is 3%, what is the preferred share price?

Question

Quizplus · Accepted Answer

To calculate the price of a preferred share, we use the formula:

Price of preferred share = dividend / (risk-free rate + risk premium)

Dividend = stated value x dividend rate = $20 x 10% = $2
Risk-free rate = 4%
Risk premium = 3%

Price of preferred share = $2 / (4% + 3%) = $2 / 7% = $28.57

Therefore, the preferred share price is $28.57, which is option B.