Question

The Jones Company plans to issue preferred stock with a perpetual annual dividend of $5 per share and a par value of $30. If the required return on this stock is currently 20%, what should be the stock's market value?
a. $ 50
b. $150
c. $ 25
d. $ 10
e. $100

Answer 1

Answer:

c) $25

Explanation:

The value of a preferred stock is the present value of the constant dividend payable for the foreseeable future discounted at the required rate of return

Price = Constant dividend/ required return

The constant dividend = Dividend rate × par value

Dividend as be given as $5 per share

requited return - 20%

So the price of the stock would be

Price = 5/0.2

= $25