ABC Company's preferred stock pays a constant dividend of $2 per share in perpetuity (Zero Growth). If the required return is 8%, what price should you be willing to pay for the stock?

Question

Viviana Hansen

Business

8 October, 12:36

ABC Company's preferred stock pays a constant dividend of $2 per share in perpetuity (Zero Growth). If the required return is 8%, what price should you be willing to pay for the stock?

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Roderick Bruce · Answer 1

Price per share of preference share = $25

Explanation:

Preference dividend is generally fixed, and does not change as there is a standard rate prescribed at the time of issue of preference shares.

Provided here is, dividend for preference shares = $2

Expected return each year = 8%

Expected growth = 0%

Thus, cost or price per share of preference stock = Dividend/Expected Return = $2/8% = $25 each share.