Question

McKerley Corp. has preferred stock outstanding that will pay an annual dividend of $5.65 per share with the first dividend exactly 15 years from today. If the required return is 3.99 percent, what is the current price of the stock?

Answer 1

$81.88

Step-by-step explanation:

We need to first calculate the terminal value which is the value in perpetuity for this preferred stock as shown below:

terminal value of the dividend =dividend/required rate of return

dividend is $5.65

required rate of return is 3.99%

terminal value of dividend=$5.65/3.99%=$ 141.60

The preferred stock price is the present value of the dividend's terminal value value

Present value=terminal value/(1+r)^n

r is the rate of return of 3.99%

n is the of years involved which is 14,15 years from today means the end of the 14th year

present value=$141.60/(1+3.99%)^14=$81.88