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dimulka
1 month ago
7

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
Business
1 answer:
Free_Kalibri [3.7K]1 month ago
3 0

Answer:

The price of preferred stock today is $117.92

Explanation:

Preferred dividends represent fixed payment amounts classified as perpetuities, and the company has the option to repurchase the preferred shares as they are callable.

The dividends of $20 begin after a 20-year period. We need to discount all upcoming cash flows from dividends for 20 years.

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

Today's value = Perpetuity x ( 1 + r )^-n = $353.98 x ( 1 + 0.0565 )^-20 = $117.92

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