Question

In 2018, Smiths Corp. issued a $50 par value preferred stock that pays a 6 percent annual dividend. Due to changes in the overall economy and in the company's financial condition, investors are now requiring a 7 percent return. What price would you be willing to pay for a share of the preferred if you receive your first dividend one year from now?

Answer 1

Answer:

Hence, the Current Price is $42.85

Explanation:

Given that

Par value = $50

Annual Dividend percentage = 6%

Annual dividend = $50 × 6% = $3

Required rate of return = 7%

based on the above information

The price that should be paid one year from now is

Required Return = Annual Dividend ÷ Current Price × 100

7 = $3 ÷ Current Price × 100

So, the current price is

= $42.85

Hence, the Current Price is $42.85