Swan Ltd has preference shares outstanding that pay a fixed dividend of $2.70 each year.  If investors require a return of 12%, what is the current value for the shares?


Group of answer choices

$25.20

$25.00

$27.00

$22.50

$225.00
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To find the current value of the preference shares, we can use the formula for the value of a perpetuity:

\[
\text{Value of the preference share} = \frac{\text{Dividend}}{\text{Required return}}
\]

Given:
- Fixed dividend = $2.70
- Required return = 12% = 0.12

Now, plug in the values:

\[
\text{Value} = \frac{2.70}{0.12} = 22.50
\]

Thus, the current value of the shares is **$22.50**.

Would you like further explanation or have any questions?

Here are five related questions to explore further:
1. How does the required return impact the value of preference shares?
2. What are the key differences between preference shares and common shares?
3. How would the value of the preference share change if the required return was 10%?
4. Can the value of preference shares fluctuate like common shares?
5. How is the required return for preference shares determined?

**Tip:** The value of a preference share is inversely proportional to the required return; as the required return increases, the value of the share decreases.

Swan Ltd has preference shares outstanding that pay a fixed dividend of $2.70 each year. If investors require a return of 12%, what is the current value for the shares? Group of answer choices: $25.20, $25.00, $27.00, $22.50, $225.00

Learn how to calculate the current value of preference shares for Swan Ltd, which pays a fixed dividend of $2.70 annually, with a required return of 12%. This finance problem uses the perpetuity formula to find the share value. Suitable for Grades 11-12.

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