Piercing Publishers recently issued preference shares with a fixed annual dividend of $3.00 per share.Investors require a 5% return on similar preference share issues.The share is currently selling for $65.Is the share a good buy?

Question

Quizplus · Accepted Answer

To determine whether the share is a good buy, we need to calculate the effective dividend yield that investors will receive. 
The annual dividend per share is $3.00, which represents a dividend yield of 4.6% ($3.00/$65). However, investors require a 5% return on similar preference share issues, which means that the share is overvalued by 0.4% (5% - 4.6%). Therefore, the share is not a good buy as it is overvalued by $5.

Piercing Publishers Recently Issued Preference Shares with a Fixed Annual