Piercing Publishers recently issued preferred stock with a fixed annual dividend of $3.00 per share. Investors require a 5% return on similar preferred stock issues. The stock is currently selling for $65. Is the stock a good buy?
A) Yes, as it is undervalued $5.
B) Yes, as it is undervalued $10.
C) No, as it is overvalued $5.
D) No, as it is overvalued $10.

Question

Quizplus · Accepted Answer

To determine if the stock is a good buy, we need to compare the required return of 5% to the dividend yield. The annual dividend is $3.00 per share, and the current price is $65 per share, so the dividend yield is:

$3.00 / $65 = 0.0462 or 4.62%

Since the required return of 5% is higher than the current dividend yield of 4.62%, the stock is overvalued by $5. Therefore, the best answer is C, No, as it is overvalued $5.

Piercing Publishers Recently Issued Preferred Stock with a Fixed Annual