A company pays a dividend of $6 per share to the holders of its perpetual preferred stock. The appropriate discount rate is 6.5% per year. What is the value of the preferred stock?
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A. B. C. D.Explanation
Value = dividend/discount rate = 6/0.065= $92.31.
To calculate the value of the perpetual preferred stock, we can use the formula for the present value of a perpetuity. The present value of a perpetuity is calculated by dividing the cash flow by the discount rate.
In this case, the perpetual preferred stock pays a dividend of $6 per share, and the appropriate discount rate is 6.5% per year.
The formula to calculate the value of the perpetual preferred stock is:
Value = Dividend / Discount Rate
Value = $6 / 6.5% = $6 / 0.065
Using this formula, we can calculate the value of the preferred stock:
Value = $6 / 0.065 = $92.31
Therefore, the value of the preferred stock is $92.31.
The correct answer is D. $92.31.