Question

Each quarter, Cullumber, Inc., pays a dividend on its perpetual preferred stock. Today the stock is selling at $64.00. If the required rate of return for such stocks is 17.00 percent, what is the quarterly dividend paid by this Cullumber?

Answer 1

Quarterly dividend = $2.72 per share

Step-by-step explanation:

The dividend payment made by a preferred stock is in terms of a perpetuity as the preferred stock pays a constant dividend throughout its perpetual life. So, we can calculate the annual dividend payment made by the preferred stock using the formula for the present value of perpetuity. The formula is as follows,

Present value = Dividend or Cashflow / r

Where,

r is the required rate of return

As we already have the values of Current stock price which is the present value and r, we can plug in these values in the formula to calculate the annual dividend.

64 = Dividend / 0.17

64 * 0.17 = Dividend

Dividend = $10.88

As, 10.88 is the annual dividend, the quarterly dividend will be,

Quarterly dividend = 10.88 / 4 = $2.72 per share