Question

The National Bank of Columbia has issued perpetual preferred stock with a $100 par value. The bank pays a quarteriy dividen of $3.10 on this stock. What is the current price of this preferred stock given a required rate of return of 8.2 percent? (Round two decimal places.)

A. $163.06
B. $143.25
C. $151.22
D. $137.57

Answer 1

To calculate the price of a perpetual preferred stock, use the concept of present discounted value (PDV). Given the dividend payment and the required rate of return, calculate the present value of the dividends and sum them up to get the current price of the stock.

Step-by-step explanation:

To calculate the price of a perpetual preferred stock, we can use the concept of present discounted value (PDV). Given that the stock pays a quarterly dividend of $3.10 and the required rate of return is 8.2%, we can calculate the present value of these dividends and sum them up to get the current price of the stock.

Using the formula for PDV, we can calculate the present value of the dividends:

PDV = Dividend / (1 + Required Rate of Return)^n

Where Dividend is $3.10 and n is the number of periods in a year (4 in this case).

Calculating the PDV for each dividend and summing them up, we get the current price of the preferred stock to be $151.22 (Option C).