The Hold Up Bank has issued 40,000,000 shares of preferred stock. Each share pay

Question

The Hold Up Bank has issued 40,000,000 shares of preferred stock. Each share pays a $1.00 quarterly dividend in perpetuity. If the next dividend is to be paid later today, and one preferred share currently costs $51.00, what is the cost of preferred equity? Calculate as an EAR, not an APR. Enter your answer as a percent rounded to two decimals. Hint: The stock price is simply the present value of the expected future cash flows. Here the cash flows (dividends) happen to be a constant perpetuity with the first payment taking place today. The Hold Up Bank has issued 40,000,000 shares of preferred stock. Each share pays a $1.00 quarterly dividend in perpetuity. If the next dividend is to be paid later today, and one preferred share currently costs $51.00, what is the cost of preferred equity? Calculate as an EAR, not an APR. Enter your answer as a percent rounded to two decimals. Hint: The stock price is simply the present value of the expected future cash flows. Here the cash flows (dividends) happen to be a constant perpetuity with the first payment taking place today.

Explanation / Answer

Present Value of share $51 Dividend amount $1 Payment period Quarterly Payment in perpetuity Return per quarter=r 51=1/r r=1/51= 0.019608 Quarterly cost of preferred share 1.96% Effective annual return (EAR)=((1+r)^4)-1 EAR=((1.019608)^4)-1= 0.080768 Cost of preferred equity (EAR) 8.0768% Cost of preferred equity (EAR) 8.1% (Rounded )

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