Question

Carby Hardware has an outstanding issue of perpetual preferred stock with an annual dividend of $5.10 per share. If the required return on this preferred stock is 6.5%, at what price should the preferred stock sell

Answer 1

Answer:

PV = $78.46153 rounded off to $78.46

Explanation:

A perpetuity is an unlimited series of cash flows that are of constant amount and occur after equal intervals of time. As they are unlimited in number, we say that they are perpetual. A perpetual preferred stock can also be said to be in form of a perpetuity as it pays a constant dividend after equal intervals of time. To calculate the price of the preferred stock, we use the present value of perpetuity formula which is,

PV = Cash flow / r

Where,

• r is the required rate of return

PV = 5.1 / 0.065

PV = $78.46153 rounded off to $78.46