E-Eyes.com just issued some new preferred stock. The issue will pay a quarterly
ID: 2738609 • Letter: E
Question
E-Eyes.com just issued some new preferred stock. The issue will pay a quarterly dividend of $9.50 in perpetuity, beginning exactly one quarter from now. If the market requires an annual return of 12.00 percent with quarterly compounding, 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.) NOTE: The cash flows are quarterly.
Answer: Stock price $ 316.67
How much would a share of preferred stock cost today if the dividends begin 10 years from now? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) NOTE: The cash flows are quarterly.
Answer: ?????
Explanation / Answer
Price of preferred stock = Quarterly preference dividend/Quarterly required return
= $9.50/3%
= $316.67
Present value = P×(1÷(1+r)^n)
P is payment
r is interest rate per period
n is number of periods
= $316.67×(1÷(1+3%)^40)
Present value of preferred stock = $97.08
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