Jed plans to purchase a deferred dividend preferred stock. The stock has a dividend rate of 5%, a $100 par value, and will pay its first annual dividend in six years. If Jed's required return on the stock is 6.75%, what price should he pay for the stock now?
A) $50.06
B) $53.44
C) $58.04
D) $74.07

Question

Quizplus · Accepted Answer

The price of the stock can be calculated using the present value of the deferred dividends. The dividend is $5 (5% of $100 par value), and the first payment is in six years. The present value of a perpetuity starting in six years is calculated as $5 / 0.0675 = $74.07, and then discounted back to the present value: $74.07 / (1 + 0.0675)^6 = $53.44.

Jed Plans to Purchase a Deferred Dividend Preferred Stock