Question

Carby Hardware has an outstanding issue of perpetual preferred stock with an annual dividend of $2.30 per share. If the required return on this preferred stock is 6.5%, at what price should the preferred stock sell?

Answer 1

$ 35.38

Explanation:

Given data:

Annual dividend per share = $ 2.30

Required return on the preferred stock = 6.5 %

Thus,

Selling price of the preferred stock

= Annual dividend per share / Required return on the preferred stock

on substituting the respective values, we get

Selling price of the preferred stock = $ 2.30 / 6.5% = $ 2.30 / 0.065

or

Selling price of the preferred stock = $ 35.38