Question

Nofal pays dividend every month of $1.00 on its preferred stock. The requird return is 5% compounded monthly. What is the stock worth today?

Answer 1

The formula used to calculate the value of a preferred stock is:
Preferred stock value=Annual dividend/Required return.

Note: If a company pays monthly dividend, we need to either convert it to annual dividend by multiplying by 12 or we need to divide required return by 12 to make it monthly return (in case if it is not mentioned in the question that the required return is compounded monthly).

However, in the question both the dividend and required return are given on monthly basis. .
So, here we can use the formula:
Preferred stock value=Dividend paid/Required return

Dividend paid=$1
Required return=5%

Preferred stock value=$1/5%=$1/0.05=$20