Question

You are interested in buying the preferred stock of a bank that pays a dividend of $2.15 every quarter. If you discount such cash flows at 8 percent, what is the value of this stock?

Answer 1

The value of the preferred stock is $107.50.

Step-by-step explanation:

The value of the preferred stock can be determined by calculating the present value of its dividends. In this case, the stock pays a dividend of $2.15 every quarter, totaling $8.60 per year. To calculate the present value, we need to discount these cash flows at 8 percent. Using the present value formula, the value of the preferred stock would be:

Value = Dividend / Discount Rate = $8.60 / 0.08 = $107.50

Therefore, the value of this stock is $107.50.