E-Eyes just issued some new preferred stock. The issue will pay an annual dividend of $14 in perpetuity, beginning 6 years from now. If the market requires a 12 percent return on this investment, how much does a share of preferred stock cost today?

Price of stock = $66.19

Explanation:

The price of preferred stock is the dividend payable discounted at the required rate of return of 12%.

Price = Dividend/required rate of return

Discount the dividend to to its worth in year year 5

Price = 14/0.12 = 116.666

Step 2

Discount the dividend to year o

Price of stock = 116.66 * 1.12^ (-5) = 66.19

Price of stock = $66.19