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? |

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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