Question

E Eyes.com has a new issue of preferred stock it calls 20/20 preferred. The stock will pay a $20 dividend per year, but the first dividend will not be paid until 20 years from today. If you require a 10.50 percent return on this stock, how much should you pay today? Round to 2 decimals.

Answer 1

Answer:

$28.56

Explanation:

Given that

n = 19 years as dividends is not paid until 20 years

Dividend = $20

Required return = 10.5%

Price of stock 19 years from now = Dividends/Required return

= 20/10.5%

= 20/0.105

= 190.47

Price of stock today = Future value/(1 + r)^n

= 190.47/(1.105)^19

= 190.47/ 6.67

= 28.556

= $28.56