bob just issued some new preferred stock. The issue will pay an annual dividend
ID: 2651581 • Letter: B
Question
bob just issued some new preferred stock. The issue will pay an annual dividend of $25 in perpetuity, beginning 14 years from now. If the market requires a return of 3.9 percent on this investment, how much does a share of preferred stock cost today? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))
bob just issued some new preferred stock. The issue will pay an annual dividend of $25 in perpetuity, beginning 14 years from now. If the market requires a return of 3.9 percent on this investment, how much does a share of preferred stock cost today? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))
Explanation / Answer
Value of perpetuity = Dividend amount/rate
= 25/3.9% = $641.0256
This is the value of the preferred stock 14 years from now.
cost of preferred stock today = 641.0256/(1+rate)^time
= 641.0256/1.039^14
= $375.20
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