A preferred stock is expected to pay a constant quarterly dividend of $1.25 per quarter into the future. The required rate of return, Rs, on the preferred stock is 13.5 percent. What is the fair value (or price) of this stock?

Question

Business

Ezekiel Delgado

18 November, 08:15

A preferred stock is expected to pay a constant quarterly dividend of $1.25 per quarter into the future. The required rate of return, Rs, on the preferred stock is 13.5 percent. What is the fair value (or price) of this stock?

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Answers (1)

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Russell Love · Answer 1

The share will cost $37.04

Explanation:

We divide the quarterly dividend by the quarterly rate to get the present intrinsic value of the stock:

13.5% = 13.5/100 = 0.135

now we divide by 4:

0.135 / 4 = 0,03375‬ quarterly rate

1.25 / 0.03375 = 37,037037 = $37.04 value of the share according to the present value of their future cash dividends.