Question

Pacific Gas & Electric has an issue of preferred stock that currently offers investors a return of 5.79% and pays an annual dividend of $1.4875. One year ago, investors required a 5.03% rate of return. At what price should Pacific Gas & Electric’s preferred stock have sold then?

Answer 1

Annual Dividend of Preferred Stock = $1.4875

One year ago,

Required Rate = 5.03%

So,

Price of Preferred Stock = Annual Dividend/Interest Rate

Price of Preferred Stock = 1.4875/0.0503

Price of Preferred Stock = $29.57

Answer 2

we can use the formula for the price of preferred stock:

$$\text{Price}=\frac{\text{Annual Dividend}}{\text{Required Rate of Return}}$$

Given:

• Annual Dividend = $1.4875

• Required Rate of Return (one year ago) = 5.03% or 0.0503

Calculation:

$$\text{Price}=\frac{\mathrm{\$}1.4875}{0.0503}\approx \mathrm{\$}29.57$$

Answer:
One year ago, Pacific Gas & Electric’s preferred stock should have sold for approximately $29.57 per share.