Homework #6 McGraw-Hill Connect | ebook Figure 8.4,jpg 663x818 p E connect FINA

Question

Homework #6 McGraw-Hill Connect | ebook Figure 8.4,jpg 663x818 p E connect FINA 5320 - Managerial Finan 2018 WO1: Fall 2018 WO1 FINANCE Homework #6 Question 6 (of 9) 6. Fifth National Bank just issued some new preferred stock. The issue will pay an annual dividend of $11 in perpetuity, beginning 16 years from now. If the market requires a return of 4.1 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) Stock price

Explanation / Answer

Price of preferred stock can be found out by dividing the dividend payout by the expected return. We have the dividend payout in the year 16 hence we can find the price in the year 15

P15=11/0.041

P15 =$268.29

The price today is the PV of the stock price in future so the price today will be

P0=268.29/(1.041)15

P0=146.84

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