Question

A company has an outstanding issue of perpetual preferred stock with an annual dividend of $5 per share. If the required return on the preferred stock is 6.25%, at what price should the preferred stock sell?

Answer 1

$80

Step-by-step explanation:

The computation of the price of preferred stock to sell is shown below:

Cost of preferred stock = Annual dividend ÷ required return on the preferred stock

= $5 ÷ 6.25%

= $80

Simply we divide the annual dividend by the required return on the preferred stock so that the correct price of preferred stock to sell can be computed