Question

E-Eyes.com just issued some new 20/20 preferred stock. The issue will pay an annual dividend of $10 in perpetuity, beginning 15 years from now. If the market requires a return of 4 percent on this investment, the current value of the preferred stock can be calculated using the dividend discount model or perpetuity formula to determine its present worth.

Answer 1

The student's question involves using the dividend discount model and the concept of present discounted value (PDV) to calculate the current value of new preferred stock as well as the value of shares in a company like Babble, Inc.

Step-by-step explanation:

The question involves calculating the present value of future dividends using the dividend discount model, also known as the present discounted value (PDV) method. In the example given, E-Eyes.com's new preferred stock will pay an annual dividend of $10 in perpetuity, beginning 15 years from now. To calculate its current value, assuming a market return of 4%, one would discount the perpetual dividend back to the present value.

Another example provided discusses how an investor would use PDV calculations to determine what to pay for a share of stock in Babble, Inc. Given the projected profits and the timing of these profits, an investor can determine the value of a share. The process requires discounting the anticipated dividends back to their present value at a given interest rate and then dividing by the number of shares.