Question

E-Eyes just issued some new preferred stock. The issue will pay an annual dividend of $18 in perpetuity, beginning 7 years from now. If the market requires a return of 3.2 percent on this investment, how much does a share of preferred stock cost today? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Answer 1

Answer:

price of preferred stock = $465.65

Explanation:

given data

annual dividend = $18

return = 3.2 percent = 0.032

solution

we know prefer stock price is express as

prefer stock price Vp = $\frac{d}{Kp}$

here Vp is value of preference share and d is constant dividend and Kp is rate

so

prefer stock in 6th year will be = $\frac{18}{0.032}$ = $562.50

so that price of preferred stock today = $\frac{P6}{(1+Kp)^{n-1}}$

price of preferred stock = $\frac{562.50}{(1+0.032)^{7-1}}$

price of preferred stock = $465.65