Question

E-Eyes just issued some new preferred stock. The issue will pay an annual dividend of $14 in perpetuity, beginning 19 years from now. If the market requires a return of 4.4 percent on this investment, how much does a share of preferred stock cost today

Answer 1

Price of stock = $181.78

Step-by-step explanation:

PV of dividend in year 13

PV =A×(1- (1+r)^(-n)/r )

PV of dividend in (year 13) = 14/(0.044=318.18

PV of dividend in year 0

PV = Div× (1+r)^(-n)

Dividend in year 13, r-interest rate, n- number of years

PV in year 0 = 318.1818182 × 1.044^(-13)= 181.78

Price of stock = $181.78