E-Eyes.com just issued some new preferred stock. The issue will pay a quarterly
ID: 2739692 • Letter: E
Question
E-Eyes.com just issued some new preferred stock. The issue will pay a quarterly dividend of $4.50 in perpetuity, beginning exactly one quarter from now. If the market requires an annual return of 18.00 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. Stock price $ How much would a share of preferred stock cost today if the dividends begin 7 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. Stock price $
Explanation / Answer
1. Yearly dividend = $4.5*4 = $18
Current market price of preference stock = $18/0.18 =$100
2. preferred stock cost today if the dividends begin 7 years from now is as follows . we have to discount it back to year 6 end with discount rate.
P0 = $100/ (1.18)^6 =$100 *.370432 = $37.043
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