Question

Calculate the value of a preferred stock that pays a dividend of ​$6.50 per share when the​ market's required yield on similar shares is 14 percent. The value of the preferred stock is ​$ nothing per share.

Answer 1

In order to find the value of a preferred stock we discount its future payments at the required yield on the stock. Because the preferred stock is perpetual in nature, meaning it pays the same amount forever, we can find it's value by dividing its dividend by its required yield. So in this case the dividend is 6.5 and the required yield is 14% so the value of the preferred stock is

6.5/0.14= $46.42

Step-by-step explanation: