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18 November, 03:43

E-Eyes just issued some new preferred stock. The issue will pay an annual dividend of $20 in perpetuity, beginning 20 years from now. If the market requires a return of 5.65 percent on this investment, how much does a share of preferred stock cost today

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  1. 18 November, 04:06
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    Preferred stock costs $117.92 today

    Explanation:

    Preferred dividend are the fix amount payment which represents the perpetuity, the company can repurchase the preferred share as it is callable.

    The dividends of $20 represent a perpetuity beginning after 20 years. We have to discount all cash flows in the form of dividend for 20 years.

    Perpetuity = Cash flow / Rate of return = $20 / 5.65% = $20 / 0.0565 = 353.98

    Today's price = Perpetuity x (1 + r) - n = $353.98 x (1 + 0.0565) ^-20 = $117.92
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Home » Business » E-Eyes just issued some new preferred stock. The issue will pay an annual dividend of $20 in perpetuity, beginning 20 years from now. If the market requires a return of 5.
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