A perpetual preferred stock has a face value of $1,000 and a coupon rate of 6% per year. If it is issued at $850, what's the implicit annual discount rate?
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A preferred stock is valued like a perpetuity. The price of a preferred stock with a face value F and a coupon rate c equals F*c/r, where r is the implicit discount rate. In this case, we have 850 = 1,000*0.06/r, giving r = 7.06%.