Question

The Columbia Consumer Products Co. has issued perpetual preferred stock with a $100 par value. The firm pays a quarterly dividend of $2.60 on this stock. What is the current price of this preferred stock given a required rate of return of 12.5 percent?

A) $47.25
B) $80.00
C) $20.80
D) $83.20

Answer 1

The current price of the preferred stock is d. $83.20.

Step-by-step explanation:

To calculate the current price of the preferred stock, we need to use a formula called the present value of perpetuity. The formula is: Price = Dividend / Required Rate of Return.

In this case, the dividend is $2.60 per quarter and the required rate of return is 12.5%. Converting the required rate of return to a quarterly rate gives us 0.125 / 4 = 0.03125. Plugging these values into the formula, we get: Price = $2.60 / 0.03125 = d. $83.20.