Question

E-Eyes just issued some new preferred stock. The issue will pay an annual dividend of $27 in perpetuity, beginning 16 years from now. If the market requires a return of 4.1 percent on this investment, how much does a share of preferred stock cost today?

Answer 1

$360.43

Step-by-step explanation:

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

First step is for us to calculate the price of the stock in Year 15 which is a year before the first dividend payment.

P15= $27 / .041

P15= $658.54

Last step is to calculate for the price of the stock today

P0= $658.54/ (1+.041)^15

P0= $658.54/ (1.041)^15

P0=$360.43

Therefore the amount that a share of preferred stock cost today will be $360.43