E-Eyes just issued some new preferred stock. The issue will pay an annual dividend of $20 in perpetuity, beginning 20 years from

Question

3 years ago

7

now. If the market requires a return of 5.65 percent on this investment, how much does a share of preferred stock cost today

1 answer:

Strike441 [17] · Answer 1 · 2022-07-10T20:05:56+03:00

Answer:

Preferred stock costs $117.92 today

Explanation:

Preferred dividend are the fix amount payment which represents the perpetuity, the company can repurchase the preferred share as it is callable.

The dividends of $20 represent a perpetuity beginning after 20 years. We have to discount all cash flows in the form of dividend for 20 years.

Perpetuity = Cash flow / Rate of return = $20 / 5.65% = $20 / 0.0565 = 353.98

Today's price = Perpetuity x ( 1 + r )-n = $353.98 x ( 1 + 0.0565 )^-20 = $117.92