Question

E-Eyes just issued some new preferred stock. The issue will pay an annual dividend of $14 in perpetuity, beginning 6 years from now. If the market requires a 12 percent return on this investment, how much does a share of preferred stock cost today?

Answer 1

Price of stock= $66.19

Step-by-step explanation:

The price of preferred stock is the dividend payable discounted at the required rate of return of 12%.

Price = Dividend/required rate of return

Discount the dividend to to its worth in year year 5

Price = 14/0.12= 116.666

Step 2

Discount the dividend to year o

Price of stock = 116.66× 1.12^(-5)= 66.19

Price of stock= $66.19