A preferred stock has a $100 par value and a dividend payout of $8 per year. Your required return is 10%. What is the value of the preferred stock?
Click on the arrows to vote for the correct answer
A. B. C. D.D
Value of preferred stock is Dividend/Required return or $8/0.1 = $80.
To calculate the value of the preferred stock, we need to use the formula for the present value of a perpetuity. A perpetuity is a stream of cash flows that continues indefinitely. In this case, the preferred stock pays a fixed dividend of $8 per year.
The formula for the present value of a perpetuity is:
Value = Dividend / Required Return
Given that the dividend payout is $8 per year and the required return is 10%, we can substitute these values into the formula:
Value = $8 / 10% = $8 / 0.10 = $80
Therefore, the value of the preferred stock is $80.
The correct answer is D. $80.