Question

# Fifth National Bank just issued some new preferred stock. The issue will pay an annual dividend...

 Fifth National Bank just issued some new preferred stock. The issue will pay an annual dividend of \$19 in perpetuity, beginning 8 years from now. If the market requires a return of 3.3 percent on this investment, how much does a share of preferred stock cost today? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Solution:

An annual dividend of \$19 to perpetuity, beginning 8 years from now.

That means Dividend \$ 19 paid from the end of 8th year i.e. D8=\$19

If the market rate of return: 3.3%

Then, Price at the end of 7th year: Dividend at 8th Year / Market rate of return

Price at the end of 7th year: \$19/0.033 = \$ 575.75

Now calculation of Price of the Preferred Share as on today:

Price of a preferred share as on today: Price et year 7 end / (1+Mkt rate of return)^7

Price of a preferred share as on today: \$ 575.75 / (1+ 0.033)^7

Price of a preferred share as on today: \$ 458.70

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