Question

Assume that the dividend on Central Power Company's $3.25 preferred stock issue is paid annually at the end of the year. Determine the value of this preferred stock to an investor who requires a 12 percent rate of return.

A) $3.25
B) $39
C) $12
D) $27.08

Answer 1

The value of Central Power Company's preferred stock to an investor who requires a 12 percent rate of return is approximately $27.08, calculated using the present value of a perpetuity formula.

Step-by-step explanation:

To determine the value of the preferred stock, we need to calculate the present value of its dividend payments. The annual dividend on Central Power Company's $3.25 preferred stock issue is $3.25. We can use the formula for the present value of a perpetuity to calculate its value.

PV = D / r

Where PV is the present value, D is the annual dividend, and r is the required rate of return. Substituting the values into the formula, we get:

PV = $3.25 / 0.12 = $27.08

Therefore, the value of the preferred stock to an investor who requires a 12 percent rate of return is $27.08.