A preferred stock pays a quarterly dividend of $2.50 every 3 months. If the required return...

Question

Question

A preferred stock pays a quarterly dividend of $2.50 every 3 months. If the required return per year is 10%, what is the price of this stock today?

Answer provided: $100.00 Why and what is the formula?

business finance

Answer 1

Answer #1

Present value of a perpetuity = C/r

r = .10
C is the annual payment
The quarterly (every 3 months) dividend is $2.50.
The annual payment is 2.50*4
The annual payment is $10.

Present value of the stock = 10/.10
Present value of the stock = 100.

The price of the stock today is $100.

Answer 2

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