An issued stock has dividends that have grown consistently at 10% per year for m

Question

An issued stock has dividends that have grown consistently at 10% per year for many years, and on that pace the next dividend in one year will be $3 (expecting to continue to grow at 10%, indefinitely). If the markets required return on the stock is 12%, what does the stock sell for today? An issued preferred stock has a par value of $100, and pays annual dividend equal to 8% of par value. If the required return on the stock is 6%, and the next dividend is paid in one year, what is the market price of the stock today?

Explanation / Answer

Price of stock = Next Dividend / ( Required return - Growth rate) = 3 / ( 12% - 10%) = 150

Price of preferred stock = Annual Dividend / Required return = 100 * 8% / 6% = 133.33

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