Final answer:
The current price of the First Bank of Flagstaff's perpetual preferred stock, with quarterly dividends of $1.65 and a required return of 11.6%, is calculated using the formula for perpetual cash flows and is $56.90.
Step-by-step explanation:
The current price of the perpetual preferred stock issued by the First Bank of Flagstaff, which pays a quarterly dividend of $1.65 and has a $100 par value, can be estimated using the present discounted value (PDV).
The required rate of return is an annual rate of 11.6%, but since dividends are paid quarterly, we need to divide this by 4 to get the quarterly rate, which is 2.9%. The price of the stock is the present value of the perpetual stream of quarterly dividends, calculated as the dividend amount divided by the quarterly rate of return.
To find the current price of the stock:
Price = Dividend per quarter / Quarterly rate of return
Price = $1.65 / (0.116/4) = $1.65 / 0.029 = $56.90
This formula represents the price of a stock based on its expected future dividends and the required rate of return.