Question

A company plans to issue (perpetual) preferred stock with an annual dividend of $6.50 per share. If the required return on this is 8.50%, at what price should the stock sell (round your answer to two decimal places)?

(i) Describe and interpret the assumptions related to the problem.

Answer 1

To calculate the price at which the preferred stock should sell, divide the annual dividend by the required return. In this case, the price per share is approximately $76.47.

Step-by-step explanation:

To calculate the price at which the preferred stock should sell, we need to divide the annual dividend by the required return. In this case, the annual dividend is $6.50 and the required return is 8.50% (or 0.085 as a decimal). So, the price per share can be calculated as:

Price per share = Annual dividend / Required return

Price per share = $6.50 / 0.085 = $76.47 (rounded to two decimal places)

Therefore, the preferred stock should sell at approximately $76.47 per share.