Question

1. What is the price of a share of preferred stock that has a dividend of $3 if the cost of preferred
(rp) is 15%

2. What would you pay for a share of common stock if you expect the next dividend to be $3
and you expect to sell it in one year for $25, assuming the cost of equity (re) is 15%.

Answer 1

1.Price of preferred stock=annual dividend/cost of preferred stock

=(3/0.15)

=20

2.Current price=Future dividends and value*Present value of discounting factor(rate%,time period)

=3/1.15+25/1.15

=$24.35(Approx).