Question

A preferred stock pays an annual dividend of $3.50. If the return required by shareholders is 11% and the company is expecting earnings growth of 4%, then the price per share for this preferred stock is .

Answer 1

$50 is the price of the preferred stock

Step-by-step explanation:

In this question, we are asked to calculate the price per share for a preferred stock.

To calculate this, we proceed as follows

Preference Dividend Per share = (D) = $3.50

Required Return (kp) = 11%

Growth Rate (g) = 4%

Mathematically, the Price of the Preference Stock Per Share = D / (Kp - g)

Price = $3.50 / ( 11% - 4% )

Price = $3.50 / 0.07= $50