Question

The Fridge-Air Company's preferred stock pays a dividend of $4.50 per share annually. If the required rate of return on comparable quality preferred stocks is 14 percent, calculate the value of Fridge-Air's preferred stock.

Answer 1

Answer:

Present value = $32.1428 rounded off to $32.14

Explanation:

The preferred stock is a stock that pays a constant dividend and after equal interval of time for an indefinite period. Thus, it is like a perpetuity. The formula for the present value of perpetuity is,

Present value = Cash flow / r

Where,

• r is the required rate of return

In case pf preferred stock, the cash flow is the dividend paid by the preferred stock.

So, the value of the preferred stock is,

Present Value = 4.5 / 0.14

Present value = $32.1428 rounded off to $32.14