Murky Pharmaceuticals has issued preferred stock with a par value of $100 and a 5% dividend. The investors' required yield is 10%. What is the value of a share of Murky preferred?

Question

Quizplus · Accepted Answer

The value of preferred stock is calculated by dividing the annual dividend by the required yield. The annual dividend is 5% of $100, which is $5. The required yield is 10%, so the value of the stock is $5 / 0.10 = $50.

Murky Pharmaceuticals Has Issued Preferred Stock with a Par Value