Question

The market price of a share of preferred stock is $ 22.62 and the dividend is $ 2.10. What discount rate did the market use to value the stock?

Answer 1

The market used a discount rate of approximately 9.29% to value the preferred stock with a price of $22.62 and a dividend of $2.10, using the Present Discounted Value formula.

Step-by-step explanation:

The market used a discount rate to value a share of preferred stock with a market price of $22.62 and a dividend of $2.10. To find the discount rate, we can use the formula for present discounted value (PDV) of a stock dividend:

Discount Rate = Dividend / Price

Therefore:

Discount Rate = $2.10 / $22.62

After performing the division, we find that the market used a discount rate of approximately 9.29% to value the stock. This means, under the market conditions at the time, investors were expecting to earn an annual rate of return of about 9.29% on this preferred stock.