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?
A)$37.04
B)$24.36
C)$52.36
D)$18.65
E)None of these choices are correct.

Question

Quizplus · Accepted Answer

The fair value of a preferred stock that pays a constant dividend can be calculated using the formula: Price = Dividend / Required Rate of Return. Here, the annual dividend is $1.25 * 4 = $5. The required rate of return is 13.5% or 0.135. Thus, Price = $5 / 0.135 = $37.04.

A Preferred Stock Is Expected to Pay a Constant Quarterly