Question

A firm has an issue of preferred stock outstanding that has a stated annual dividend of $4. The required return on the preferred stock has been estimated to be 16 percent. The value of the preferred stock is ________.

Answer 1

Answer: $25

Explanation:

A Preferred Stock is a special stock that entities the holder to a fixed dividend. It also gives the holder priority of stock payment over common stock holders.

The Value of a preferred stock is worked out with the following formula,

Value of the preferred stock = Dividend / Required Return

So,

Value of Preferred Stock

= 4/0.16

= $25

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