Question

However, similar to bonds, preferred stockholders receive a fixed payment—their dividend—before the company’s residual earnings are paid out to its common stockholders and, as with common stock, preferred stockholders can benefit from an appreciation in the value of the firm’s stock securities. Consider the following case of Wellington Industries: Wellington Industries pays an annual dividend rate of 8.00% on its preferred stock that currently returns 10.72% and has a par value of $100.00 per share. What is the value of Wellington’s preferred stock?

Answer 1

Answer: $74.63

Step-by-step explanation:

Preferred shares are treated like perpetuities which means that the value is:

= Annual dividend/required return

Annual dividend:

= Dividend rate * Par value

= 8% * 100

= $8.00

Value of share = 8 / 10.72%

= $74.6269

= $74.63