Question

E-Eyes just issued some new preferred stock. The issue will pay an annual dividend of $13 in perpetuity, beginning 11 years from now. If the market requires a 6 percent return on this investment, how much does a share of preferred stock cost today

Answer 1

The cost of preferred stock today is $114.14

Step-by-step explanation:

To calculate the cost of preferred stock today, we first need to determine the cost of each share of preferred stock 11 years from now when it starts paying dividends and then discount it back to today's value.

The preferred stock pays a constant dividend and after equal interval of time for an indefinite period. Thus, it is like a perpetuity. The present value of perpetuity is,

Present value = Dividend / r

Where,

r is the required rate of return

Value Year 11 = 13 / 0.06

Value Year 11 = 216.6666667

The present value is,

Present value = 216.6666667 / (1+0.06)^11

Present value = $114.137 rounded off to $114.14