Question

Southern Utilities just issued some new preferred stock. The issue will pay a $19 annual dividend in perpetuity beginning 9 years from now. What is one share of this stock worth today if the market requires a 7 percent return on this investment

Answer 1

One share of this stock will be $97.20

Step-by-step explanation:

We have given annual dividend = $19

Time t = 9 year

Market required return = 9%

Stock price in 9 year

`P_9=(annual\ dividend)/(required\ rate)`

`P_9=(19)/(0.09)=211.11`

Now current stock price is equal to

`P_0=(P_9)/((1+rate)^9)`

`P_0=(211.11)/((1+0.09)^9)`

`P_0=97.20`

So one share of this stock will be $97.20