21. Preferred stock pays quarterly dividend of $3 a share. If investors require 12% return on a stock of a similar risk level, what is the price

Question

asked Nov 7, 2021 177k views

1 Answer

Logixplayer · Answer 1 · 2021-11-13T19:25:40+0000

Answer: $100

Step-by-step explanation:

A value of a Preferred Stock is calculated like a perpetuity which means that it is derived by dividing the cash-flow by the annual interest rate.

This Stock pays $3 per quarter. It will pay _____ per year;

= $3 * 4

= $12

Value of Preferred Stock =
(Annual Cash-flow)/(Annual Interest)

=
(12)/(0.12)

= $100