Explanation:
Calculation:
$90 × 7% = $6.30$6.30 / 6% = $105$105Since the calculated intrinsic value ($105) equals the current market price ($105), the stock is fairly valued. However, wait - let me recalculate:
Actually, the calculation shows:
Value = $6.30 / 0.06 = $105
Current price = $105
Therefore, the stock is fairly valued (option B), not overvalued. The correct answer should be B.
Ultimate access to all questions.
An analyst gathers the following information about a company's non-callable, fixed-rate perpetual preferred stock:
$90$105If the investor's required return is 6%, the preferred stock is:
A
undervalued.
B
fairly valued.
C
overvalued.
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