Explanation

To calculate the value of preferred stock, we use the formula for valuing perpetual preferred stock:

Value of Preferred Stock = Annual Dividend / Required Rate of Return

Step 1: Calculate the annual dividend

• Par value = $100
• Dividend rate = 6%
• Annual dividend = $100 × 6% = $6

Step 2: Determine the required rate of return

• The yield on comparable preferred stock issues is 11.5%
• This represents the market's required rate of return for similar risk securities
• The investor's marginal tax rate (30%) is NOT relevant for valuing the security itself, as market prices reflect pre-tax returns

Step 3: Calculate the value

• Value = $6 / 0.115 = $52.1739 ≈ $52.17

Why the other options are incorrect:

• Option B ($54.78): This might result from incorrectly using the sustainable growth rate (5%) instead of the comparable yield (11.5%), or from making a tax adjustment error
• Option C ($96.92): This might result from incorrectly using the dividend rate (6%) as the discount rate instead of the comparable yield (11.5%)

Key points:

1. Preferred stock valuation uses a perpetuity formula
2. The discount rate should be based on comparable securities' yields (11.5%)
3. The sustainable growth rate (5%) is not relevant for preferred stock valuation since preferred dividends are typically fixed
4. The investor's tax rate is not relevant for determining the market value of the security