Hooks Athletics, Inc., has outstanding a preferred stock with a par value of $30 that pays a dividend of $2.50. The preferred stock is redeemable at the option of the stockholder in 10 years at a price equal to $30. The stock may be called for redemption by the company in 15 years at a price of $32.50. (Any stock that is not redeemed at the end of 10 years can

Question

Hooks Athletics, Inc., has outstanding a preferred stock with a par value of $30 that pays a dividend of $2.50. The preferred stock is redeemable at the option of the stockholder in 10 years at a price equal to $30. The stock may be called for redemption by the company in 15 years at a price of $32.50. (Any stock that is not redeemed at the end of 10 years can
be expected to be called by the company in 15 years.)

(a). If you know that investors require a 15 percent pretax rate of return on this preferred stock, what is the current market value of this preferred stock?

(b). Would you advice investors to exercise thier redemption option? Why or why not?