Maximum value for which share can be expected to trade

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Reference no: EM131338464

World Tobacco has issued preferred stock ($10 par value) that pays an annual dividend of $0.84. The preferred stock matures in five years.

At that time, holders of the stock will receive, at their option, either $10 or one share of common stock with a value up to $14. If the common stock is trading at a price above $14, the preferred stockholders will receive a fractional share of common stock worth $14.

The current common stock price is $8.875. The common stock pays a 10 cent per share dividend. This dividend is expected to grow at a 10 percent rate per year for the next five years.

If the market requires a 12 percent rate of return on a stock of this risk and maturity, what is the maximum value for which this share can be expected to trade?

Reference no: EM131338464

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