A company's $20 face value preference shares have a dividend rate of 7 percent and a required rate of return of 11 percent.  If the market price per share for the preference share is $15, the preference share is appropriately described as being overvalued/undervalued as what?

To determine whether the preference share is overvalued or undervalued, we need to compare its **intrinsic value** (based on the required rate of return) with its **market price**.

### Step 1: Calculate the dividend.
The preference share pays a fixed dividend of 7% on the $20 face value. The dividend can be calculated as:

\[
\text{Dividend} = 0.07 \times 20 = 1.40
\]

### Step 2: Calculate the intrinsic value.
The intrinsic value of a preference share is the present value of its dividends in perpetuity. The formula is:

\[
\text{Intrinsic Value} = \frac{\text{Dividend}}{\text{Required Rate of Return}}
\]

Substitute the values:

\[
\text{Intrinsic Value} = \frac{1.40}{0.11} = 12.73
\]

### Step 3: Compare intrinsic value to market price.
The market price per share is $15, but the intrinsic value is $12.73. Since the market price is **higher** than the intrinsic value, the preference share is **overvalued**.

### Conclusion:
The preference share is **overvalued** because the market price ($15) is greater than the intrinsic value ($12.73).

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Would you like more details or have any other questions?  
Here are five questions related to this problem:

1. How is the dividend rate determined for preference shares?
2. What factors affect the required rate of return for a preference share?
3. What happens to the valuation if the required rate of return increases?
4. How do changes in market price affect the classification of a share as overvalued or undervalued?
5. What is the difference between preference shares and common shares in terms of dividends?

**Tip:** The required rate of return reflects the risk associated with an investment. The higher the risk, the higher the required return.

A company's $20 face value preference shares have a dividend rate of 7 percent and a required rate of return of 11 percent. If the market price per share for the preference share is $15, the preference share is appropriately described as being overvalued/undervalued as what?

Learn how to evaluate whether preference shares are overvalued or undervalued based on dividend rate, required rate of return, and market price. This problem focuses on the intrinsic value calculation using the perpetuity formula. Suitable for finance students.

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