Question

21. Preferred stock pays quarterly dividend of $3 a share. If investors require 12% return on a stock of a similar risk level, what is the price

Answer 1

Answer: $100

Explanation:

A value of a Preferred Stock is calculated like a perpetuity which means that it is derived by dividing the cash-flow by the annual interest rate.

This Stock pays $3 per quarter. It will pay _____ per year;

= $3 * 4

= $12

Value of Preferred Stock = $\frac{Annual Cash-flow}{Annual Interest}$

= $\frac{12}{0.12}$

= $100