Question

Fifth National Bank just issued some new preferred stock. The issue will pay an annual dividend of $22 in perpetuity, beginning 11 years from now. If the market requires a return of 3.6 percent on this investment, how much does a share of preferred stock cost today

Answer 1

$429.06

Step-by-step explanation:

The computation of the cost of today preferred stock share is shown below:

But before that first determine the preferred stock value of 11 years from now which is

= Annual dividend ÷ rate of return

= $22 ÷ 0.036

= $611.11

Now the current value is

= $611.11 × Present value of discount factor at 3.6% in 10 years

= $611.11 ÷ 1.036^10

= $429.06