Question

ABC Company's preferred stock pays a constant dividend of $2 per share in perpetuity (Zero Growth). If the required return is 8%, what price should you be willing to pay for the stock?

Answer 1

Answer:

Price per share of preference share = $25

Explanation:

Preference dividend is generally fixed, and does not change as there is a standard rate prescribed at the time of issue of preference shares.

Provided here is, dividend for preference shares = $2

Expected return each year = 8%

Expected growth = 0%

Thus, cost or price per share of preference stock = Dividend/Expected Return = $2/8% = $25 each share.