Answer: $52.17.

## 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

Author: LeetQuiz .