Value of Preferred Stock

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 = $45/.15 = $300

To calculate the value of a preferred stock, we can use the dividend discount model (DDM). The DDM calculates the present value of all future dividends to determine the intrinsic value of a stock.

The formula for the DDM is as follows:

$\text{Value of Preferred Stock} = \frac{\text{Dividend per Period}}{\text{Required Rate of Return}}$

Given the information provided:

• Par value of the preferred stock: $500
• Dividend payout per year: $45
• Required rate of return: 15%

We can substitute these values into the DDM formula to calculate the value of the preferred stock:

$\text{Value of Preferred Stock} = \frac{\$45}{0.15} = \$300$