Explanation:
The intrinsic value of a perpetual preferred share is calculated as the dividend divided by the required rate of return, i.e., $1.20 / 0.06 = $20. Since the market price ($20) equals the calculated intrinsic value, the shares are fairly valued. This aligns with the investor's required return, indicating no mispricing.
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A non-callable, non-convertible perpetual preferred share pays a fixed dividend of $1.20 and currently trades at $20. Given an investor's required rate of return is 6%, the preferred shares are most likely:
A
Undervalued.
B
Fairly valued.
C
Overvalued.