Question

E-Eyes has a new issue of preferred stock it calls 20/20 preferred. The stock will pay a $20 dividend per year, but the first dividend will not be paid until 20 years from today. If you require a return of 11 percent on this stock, how much should you pay today

Answer 1

Price to be paid for the stock = $25.032

Step-by-step explanation:

A preferred stock pays a constant amount of dividends in perpetuity.

Using the dividend valuation model, the estimate price of such a stock would be the present value (PV) of the perpetuity.

This given below as dollows:

PV= A/r

A-constant dividend,- 20 ,

r- rate of return- 11%

PV of dividend in Year 19

PV = 20/0.11= 181.8181818

PV in year in year 0

PV = 181.8181818 × 1.11^(-19) = 25.032

Price to be paid for the stock = $25.032