Question

What is the value of a preferred stock that pays a perpetual dividend of $125 at the end of each year when the interest rate is 5 percent?

Answer 1

Answer: $2500

Explanation:

The value of a preferred stock that pays a perpetual dividend of $125 at the end of each year when the interest rate is 5 percent will be calculated by using the formula:

= Cf/i

where,

Cf = Cash flow = $125

i = Interest rate = 5% = 0.05

Therefore, the value of the preferred stock will be:

= Cf/i

= $125/0.05

= $2500

The value of the preferred stock is $2500.