E-Eyes.com just issued some new preferred stock. The issue will pay an annual di
ID: 2759152 • Letter: E
Question
E-Eyes.com just issued some new preferred stock. The issue will pay an annual dividend of $15 in perpetuity, beginning 20 years from now. If the market requires a return of 4.5 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.)
E-Eyes.com just issued some new preferred stock. The issue will pay an annual dividend of $15 in perpetuity, beginning 20 years from now. If the market requires a return of 4.5 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.)
Explanation / Answer
Answer Dividend $15.00 Return 4.50% Present Value '=d/r '= 15/.045 ' = 333.33 So in year 20 present value of perpetuity = $ 333.33 Today present value will be PV = FV /( 1+r)^n ' = 333.33/(1+.045)^20 ' = $ 138.21 Cost of a preferred stock will be $ 138.21
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