Question

Your friend is wanting a consistent dividend payment. They see the preferred stock for Exxon Corp pays $3.89 annually. He wants a required return of 8.7%. What is the maximum your friend should pay for the preferred stock?

Answer 1

The maximum price your friend should pay for Exxon Corp's preferred stock with an annual dividend of $3.89 and a required return of 8.7% is approximately $44.71.

Step-by-step explanation:

To determine the maximum price your friend should pay for the preferred stock of Exxon Corp, which pays an annual dividend of $3.89, given a required return of 8.7%, we can use the dividend discount model for preferred stocks. This model suggests that the price of a preferred stock is equal to the dividend divided by the required rate of return. Therefore, the calculation to determine the maximum price your friend should pay is $3.89 ÷ 0.087, which equals approximately $44.71.