E-Eyes.com just issued some new preferred stock. The issue will pay an annual dividend of $20...

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E-Eyes.com just issued some new preferred stock. The issue will pay an annual dividend of $20...

E-Eyes.com just issued some new preferred stock. The issue will pay an annual dividend of $20 in perpetuity, beginning 7 years from now. If the market requires a 12 percent return on this investment, how much does a share of preferred stock cost today?

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Answer 1

Answer #1

The present value of the perpetuity in year 6, PV6 = (Annual Dividend in year 7)/(required rate of return)

PV6 = 20/.12

PV6 = $166.6666666667

PV0 = 166.6666666667/(1 + 0.12)^6

PV0 = $84.4385201962

This is the cost of preferred stock today.

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Answer 2

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