Value Investing - Preferred Stock Valuation

Preferred Stock Valuation

Prev Question Next Question

Question

A company pays a dividend of $8 per share to the holders of its perpetual preferred stock. The appropriate discount rate is 7% per year. What is the value of the preferred stock?

Answers

Explanations

Click on the arrows to vote for the correct answer

A. B. C. D.

Explanation

Value = dividend/discount rate = 8/0.07= $114.28.

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

Value = Dividend / Discount Rate

In this case, the dividend is $8 per share, and the discount rate is 7% per year. Let's plug these values into the formula:

Value = $8 / 0.07

Dividing $8 by 0.07 gives us:

Value = $114.28

Therefore, the value of the preferred stock is $114.28.

The correct answer is A. $114.28.

Prev Question Next Question