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A company’s $100 par perpetual preferred stock has a dividend rate of7 percent and a required rate of return of11 percent. The company’s earnings are expected to grow at a constant rate of3 percent per year. If the market price per share for the preferred stock is $75, the preferred stock is most appropriately described as being: A. overvalued by $11.36. B. undervalued by $15.13. C. undervalued by $36.36.
The market value is overvalued by $11.36 as the realistic terms the price could be near $63 where as the market price is $75. (The calculations are based on intrinsic value of shares and its comparison)
It is A
