Question

A $50 par value preferred stock pays a 7.50% annual dividend and the market currently requires a 9.00% percent return on the stock. What is the market price of the preferred stock? (Rounded to the nearest cent)

Answer 1

Using the dividend discount model, the market price of a preferred stock with a $50 par value and a 7.50% annual dividend is calculated to be $41.67 when the required return is 9.00%.

Step-by-step explanation:

To calculate the market price of the preferred stock, we'll use the dividend discount model for preferred stocks, which is the annual dividend divided by the required rate of return. The annual dividend is 7.50% of the $50 par value, so $50 x 0.075 = $3.75 per year. The market requires a 9.00% return on this stock, so we divide the annual dividend by this return rate: $3.75 / 0.09 = $41.67.

Thus, the market price of the preferred stock, rounded to the nearest cent, should be $41.67.