Question

E-Eyes just issued some new preferred stock. The issue will pay an annual dividend of $18 in perpetuity, beginning 7 years from now. If the market requires a return of 3.2 percent on this investment, how much does a share of preferred stock cost today? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Answer 1

price of preferred stock = $465.65

Step-by-step explanation:

given data

annual dividend = $18

return = 3.2 percent = 0.032

solution

we know prefer stock price is express as

prefer stock price Vp =
`(d)/(Kp)`

here Vp is value of preference share and d is constant dividend and Kp is rate

so

prefer stock in 6th year will be =
`(18)/(0.032)` = $562.50

so that price of preferred stock today =
`(P6)/((1+Kp)^(n-1))`

price of preferred stock =
`(562.50)/((1+0.032)^(7-1))`

price of preferred stock = $465.65