Question

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.)

Answer 1

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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