Question

A preferred stock has a face value of $100 and pays annual dividends at a rate of 8 percent. The required rate of return on this stock is 12 percent. What is the price of this security if the next dividend is paid in exactly one year?

Answer 1

Answer: $66.67

Step-by-step explanation:

GIVEN the following ;

Face value of preferred stock = $100

Dividend rate per annum = 8% = 0.08

Required rate of return = 12% = 0.12

Price of stock if Dividend is paid in exactly one year =?

Price of stock = ( Dividend ÷ Rate of return)

Dividend = (annual dividend rate × face value of stock)

Dividend = 0.08 × $100 = $8

Price of stock = ($8 ÷ 0.12)

Price of stock = $66.667

Therefore price of security if Dividend is paid in exactly one year = $66.67

Answer 2

Answer: $66.67

Step-by-step explanation:

The value of a Preferred Stock is calculated with the following formula,

Value of the preferred stock = Annual Dividend/rate of return

The Annual Dividend is 8% of the face value so,

= 0.08 * $100

= $8

Therefore the Value of the Stock is,

= 8/0.12

= $66.67