Question

A preferred stock pays a constant dividend of $2.43. The required rate of return is 12.3%. Calculate its price.

Answer 1

Price of the Preferred Stock

The price that would be willing to pay for the preference share is calculated by using the following formula

Price of the Preferred Stock = Annual Preferred Dividend / Required rate of return

Here, we’ve Annual Preferred Dividend per share = $2.43 per share

Required Rate of Return = 12.30%

Therefore, the Price of the Preferred Stock = Annual Preferred Dividend / Required rate of return

= $2.43 / 0.1230

= $19.76 per share

“Hence, the Price of the Preferred Stock will be $19.76”