Question

The National Bank of Columbia has issued perpetual preferred stock with a $100 par value. The bank pays a quarterly dividend of $1.40 on this stock. What is the current price of this preferred stock given a required rate of return of 8.5 percent? (Round off to two decimal places.)

A) $23.06
B) $65.88
C) $37.57
D) $43.25

Answer 1

To calculate the current price of preferred stock, use the present discounted value (PDV) approach with the given dividend and required rate of return.

Step-by-step explanation:

To calculate the current price of preferred stock, we need to use the present discounted value (PDV) approach. The PDV is the amount you should be willing to pay in the present for a stream of expected future payments. In this case, the quarterly dividend of $1.40 on the preferred stock can be considered as a stream of payments. The required rate of return is 8.5 percent.

To calculate the PDV, we use the formula: PDV = Dividend / Required Rate of Return. In this case, the PDV = $1.40 / 0.085. So, the current price of the preferred stock is $16.47.