What is the value of a preferred stock that has a par value of $100, a required rate of return of 11 percent, and pays a 7 percent annual dividend?
A) $63.64
B) $157.14
C) $909.09
D) $1,428.57
E) $2,500.00

Question

Quizplus · Accepted Answer

Preferred stock has a fixed dividend payment, which makes it a perpetuity. Therefore, the value of preferred stock can be calculated using the perpetuity formula: 
Value = Dividend / Required Rate of Return 
In this case, the annual dividend is $7 ($100 x 7%), and the required rate of return is 11%. 
Value = $7 / 0.11 = $63.64. 
Therefore, the best choice is A.

What Is the Value of a Preferred Stock That Has