Resolved: Question about a given example in this lesson.
In the given example in this lesson, it is shown how to calculate the intrinsic value of a preferred stock.
IBM:
Par Value = $100
Annual Dividend = $5
Required Rate of Return = 6%
Vo = $5/0.06 = $83.33
So it means that the Preferred Share is overpriced right and that we shouldn't buy it?
Hello Zaber!
Thanks for reaching out!
This value of $83.33 represents the stock's intrinsic value based on its expected dividend payments and your required rate of return.
Now, to determine if the stock is overpriced, compare this intrinsic value with the current market price of the stock. If the market price is higher than $83.33, the stock might be considered overpriced according to the model. This would suggest that the market price is more than what the stock is worth in terms of its expected dividend payments.
So, long story short, the preferred share is indeed overpriced and we should not buy for this price.
Best,
The 365 Team