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Purcell Corporation has preference shares with an annual dividend of $2.91. If the required return on​ Purcell's preference shares is 7.7%​, what is its​ price? ​(​Hint: For a preference​ share, the dividend growth rate is​ zero.)

Question

Purcell Corporation has preference shares with an annual dividend of $2.91. If the required return on​ Purcell's preference shares is 7.7%​, what is its​ price? ​(​Hint: For a preference​ share, the dividend growth rate is​ zero.)

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Solution

To calculate the price of the preference shares, we can use the formula for the price of a perpetuity, since preference shares have a fixed dividend and no growth rate. The formula is:

Price = Dividend / Required Return

Given in the problem, the Dividend (D) is $2.91 and the Required Return (r) is 7.7% or 0.077 in decimal form.

Substituting these values into the formula, we get:

Price = $2.91 / 0.077

Now, perform the division to find the price:

Price = $37.79

So, the price of Purcell Corporation's preference shares is approximately $37.79.

This problem has been solved

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