big oil inc has a preferred stock outstanding that pays a 9

big oil inc. has a preferred stock outstanding that pays a $9 annual dividend, if investors\' requirered rate of return is 13%, what is the market value of thes shares? If the return declnes to 11%, what is the change in stock price?

Solution

if investor\'s required rate of return is 13%,

the value of shares will be = dividend / required rate of return

=>$9 / 0.13

=>$69.23.

market value of shares if required return is 13% =>$69.23.

if required return in stock price = 11%.

market value of stock price = $9 / 0.11

=>$81.82.

therfore the change in stock price = $81.82 - 69.23 =>$12.59.

[extra: change in stock price in percentage terms = $12.59 / 69.23 *100 =>18.19%.]