Question

Carlysle Corporation has perpetual preferred stock outstanding that pays a constant annual dividend of $1.60 at the end of each year. If investors require an 8% return on the preferred stock, what is the price of the firm's perpetual preferred stock

Answer 1

The price of the stock today is $20 per share.

Step-by-step explanation:

The perpetual preferred stock is a zero growth stock as it pays a constant dividend forever. The stock can also qualify as a perpetuity as it pays a fixed dividend after equal intervals of time for an infinite period of time. The formula to calculate the present value of the perpetuity or the price of a zero growth stock is:

Price or present value = Cash flow or Dividend / r

Thus, the price of the perpetual stock today is:

Price = 1.6 / 0.08

Price = $20