Question

The National Bank of Columbia has issued perpetual preferred stock with a $100 par value. The bank pays a quarterly dividend of $1.40 on this stock. What is the current price of this preferred stock given a required rate of return of 8.5 percent?

Answer 1

The correct answer is $65.88.

Step-by-step explanation:

According to the scenario, computation of the given data are as follows:

Par value of preferred stock = $100

Dividend (quarterly) = $1.40

Rate of return = 8.5%

Rate of return (quarterly) = 8.5% ÷ 4 = 2.125%

So, we can calculate the current price by using following formula:

Current price = Dividend ÷ rate of return

By putting the value, we get

= $1.40 ÷ 2.125%

= $65.88