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28 June, 14:01

Carlysle Corporation has perpetual preferred stock outstanding that pays a constant annual dividend of $1.60 at the end of each year. If investors require an 8% return on the preferred stock, what is the price of the firm's perpetual preferred stock

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  1. 28 June, 16:49
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    The price of the stock today is $20 per share.

    Explanation:

    The perpetual preferred stock is a zero growth stock as it pays a constant dividend forever. The stock can also qualify as a perpetuity as it pays a fixed dividend after equal intervals of time for an infinite period of time. The formula to calculate the present value of the perpetuity or the price of a zero growth stock is:

    Price or present value = Cash flow or Dividend / r

    Thus, the price of the perpetual stock today is:

    Price = 1.6 / 0.08

    Price = $20
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