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18 February, 18:07

E-Eyes just issued some new preferred stock. The issue will pay an annual dividend of $14 in perpetuity, beginning 6 years from now. If the market requires a 12 percent return on this investment, how much does a share of preferred stock cost today?

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  1. 18 February, 18:17
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    Price of stock = $66.19

    Explanation:

    The price of preferred stock is the dividend payable discounted at the required rate of return of 12%.

    Price = Dividend/required rate of return

    Discount the dividend to to its worth in year year 5

    Price = 14/0.12 = 116.666

    Step 2

    Discount the dividend to year o

    Price of stock = 116.66 * 1.12^ (-5) = 66.19

    Price of stock = $66.19
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