Question

E-Eyes just issued some new preferred stock. The issue will pay an annual dividend of $6 in perpetuity, beginning 5 years from now. If the market requires a 10 percent return on this investment, how much does a share of preferred stock cost today

Answer 1

$40.98

Step-by-step explanation:

Calculation for how much does a share of preferred stock cost today

First step

P4= $6.00 / 0.1

P4= $60

Second step

The price of the stock today is what will be the present value or the PV of the stock price in the future which means that the amount that a preferred stock cost today will be calculated as :

P0= $60/ (1+0.1)^4

P0=$60/(1.1)^4

P0=$60/1.4641

P0= $40.98

Therefore how much does a share of preferred stock cost today will be $40.98