Calculating the Price of Preferred Share in SM Entertainment

How Can we Calculate the Price of Preferred Share in SM Entertainment?

Harry is interested to invest in SM Entertainment which par value for preferred share is RM100. Annual dividend for the SM entertainment company is 5 percent on par value. Calculate the price of preferred share if required rate of return is 15 percent.

Calculating the Price of Preferred Share in SM Entertainment

The price of the preferred share in SM Entertainment would be RM33.33 if the required rate of return is 15 percent.

The price of the preferred share in SM Entertainment can be calculated using the formula for the present value of a preferred stock. The formula is: Price = Dividend / Required Rate of Return.

In this case, the dividend is 5 percent of the par value, which is RM100. So, the dividend per share is RM100 * 5% = RM5.

The required rate of return is given as 15 percent, which is 0.15 in decimal form.

Using the formula, Price = RM5 / 0.15 = RM33.33.

Therefore, the price of the preferred share in SM Entertainment would be RM33.33 if the required rate of return is 15 percent.

The calculation determines the price at which an investor would be willing to pay for the preferred share, taking into account the annual dividend and the required rate of return. The required rate of return represents the minimum rate of return that the investor expects to receive in order to justify the investment. By dividing the annual dividend by the required rate of return, we arrive at the price that would make the investment worthwhile for the investor. In this case, the price of RM33.33 indicates that if an investor expects a 15 percent return on their investment, they would be willing to pay RM33.33 for each preferred share of SM Entertainment.