Final answer:
The current price of McKerley Corp.'s preferred stock, based on the given annual dividend of $5.95 starting in 11 years and a required return of 4.05 percent, is calculated using the present value of perpetuity formula. Present value calculations are an essential part of stock valuation.
Step-by-step explanation:
The question relates to the calculation of the current price of preferred stock based on the expected future dividends and the required return rate. The dividend of $5.95 per share will start to be paid in 11 years from today, and the required return rate is 4.05 percent.
To find the current price of the preferred stock, we need to calculate the present value (PV) of the perpetual dividends that will start in 11 years. To do this, we use the formula PV = D / r, where D is the dividend and r is the required return rate. But since the dividends start in 11 years, we must discount them back to the present value using the formula PV = D / (r * (1 + r)n), with n being the number of periods before the first dividend payment.
Using the given values and formula we get: PV = 5.95 / (0.0405 * (1 + 0.0405)11) which approximates to a current price of the stock, but as we do in the Babble, Inc. example, we note that these calculations are based on certain assumptions and could vary in the real world.