Question

Peppercorn Inc. has outstanding nonconvertible preferred stock​ (cumulative) that pays a quarterly dividend of​ $1.00. If your required rate of return is​ 8.0%, what should you be willing to pay for 1000 shares of the​ firm?

Answer 1

The price you should be willing to pay for 1000 shares of Peppercorn Inc.'s nonconvertible preferred stock is $50.00.

Step-by-step explanation:

To calculate the price you should be willing to pay for 1000 shares of Peppercorn Inc.'s nonconvertible preferred stock, we can use the formula for the present value of a preferred stock. The formula is:

Price = Dividend / Required Rate of Return

Given that the stock pays a quarterly dividend of $1.00, the annual dividend would be $4.00. Therefore, the price you should be willing to pay for 1000 shares of the firm would be:

Price = $4.00 / 0.08 = $50.00

Answer 2

Quarterly dividend = $1.00

Required rate of return per annum = 8% = 0.08

Quarterly rate of return = 0.08/4 = 0.02

Current market price = Quarterly dividend

Quarterly required rate of return

= $1.00

0.08

= $12.5

The amount to pay for 1,000 shares = $1.25 x 1,000 = $12,500

Step-by-step explanation:

The current market price is calculated as quarterly dividend paid divided by quarterly required rate of return. Then, we will multiply the current market price by the number of shares in order to determine the total amount to pay for the shares.