When the government bailed out the banking system during the 2008 financial crisis, they put funds into
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Question:
When the government “bailed out” the banking system during the 2008 financial crisis, they put funds into banks by buying “Senior Preferred Stock” from the banks at the following terms:
- The face value was $1,000 per share.
- Based on the face value, the stock paid a dividend of
- 5% (annual) on a quarterly basis for the first 5 years and
- 9% (annual) on a quarterly basis thereafter.
This results in the following cash flows
Quarter | 1 | 2 | ... | 20 | 21 | 22 | ... |
Dividend | 12.50 | 12.50 | ... | 12.50 | 22.50 | 22.50 | ... |
If the required return on a particularly risky bank was 10% (annual), what would the efficient market value of the preferred stock have been at the time of issue if investors expected it to remain in perpetuity?
Related Book For
Macroeconomics Principles, Applications, and Tools
ISBN: 978-0132555234
7th Edition
Authors: Arthur O Sullivan, Steven M. Sheffrin, Stephen J. Perez
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