Another preferred stock question?

Question

What is the value of a $100 par preferred stock that must be retired after 10 years if it pays a dividend of $5 annually and the investor requires a 6% rate of return?

Answer 1

The value can be calculated as the present value of an annuity of $5 for 10 payment periods AND the value of $100 in ten years, both discounted at 6%.

The value of the annuity is $36.80, and the time-value of money of $100 in ten years (discounted at 6%) is $55.84; hence, the the total value of the preferred stock is 36.80 + 55.84 = $92.64.

The stock trades below par value because the annual divided payment is only 5%, while the required rate of return is 6%.