Question

A preferred stock will pay a dividend of $1.25 in the upcoming year and every year thereafter; i.e., dividends are not expected to grow. You require a return of 12% on this stock. Use the constant growth DDM to calculate the intrinsic value of this preferred stock. Multiple Choice $11.82 $10.42 $11.56 $9.65

Answer 1

$10.42

Step-by-step explanation:

The computation of the intrinsic value of this preferred stock using the DDM method is shown below:

= Annual dividend ÷ required rate of return

where,

The Annual dividend is $1.25

And, the required rate of return is 12%

Now placing these values to the above formula,

So, the intrinsic value of the preferred stock is

= $1.25 ÷ 0.12

= $10.42

Hence, the second option is correct