Final answer:
The value of a preferred stock paying a $6.00 annual dividend with a 16% required return is $37.50. To determine this, the annual dividend is divided by the required rate of return. Investment decisions should also consider the cost of capital compared to the potential rate of return.
Step-by-step explanation:
To find the value of a preferred stock that pays $6.00 per year at a required return of 16%, you can use the dividend discount model for preferred stocks, which is the annual dividend divided by the required rate of return. Therefore, the value of the preferred stock would be $6.00 divided by 0.16, resulting in a value of $37.50 per share.
In contrast, when looking at investments in general, performing a present value calculation for different time periods involves discounting future amounts to their present value at a given rate. As an example, if a firm is considering an investment that earns 6% but could borrow money at 8%, using their cash to make the investment might not be optimal as the cost of capital is higher than the return on the investment.