Value of Preferred Stock Calculation

Explanation

The value of a preferred stock is the stated annual dividend divided by the required rate of return on preferred stock.

In this case, V = $10 a year/.10 = $100

To calculate the value of a preferred stock, we can use the formula for the present value of a perpetuity, which is:

Value of Preferred Stock = Dividend / Required Rate of Return

In this case, the dividend is $5 every 6 months, so we need to determine the annual dividend. Since there are two dividend payments per year, we can double the semi-annual dividend to find the annual dividend:

Annual Dividend = 2 * $5 = $10

The required rate of return is given as 10%, which we can express as a decimal by dividing it by 100:

Required Rate of Return = 10% = 0.10

Now we can calculate the value of the preferred stock using the formula:

Value of Preferred Stock = Annual Dividend / Required Rate of Return

Value of Preferred Stock = $10 / 0.10 = $100

The value of the preferred stock is $100, which matches the par value of the stock. The correct answer is B. "none of these answers."