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E-Eyes just issued some new preferred stock. The issue will pay an annual dividend of $14 in perpetuity, beginning 6 years from now. If the market requires a 12 percent return on this investment, how much does a share of preferred stock cost today?

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Kolawole845

Answer:

Price of stock= $66.19

Explanation:

The price of preferred stock is  the dividend payable discounted at the required rate of return of 12%.

Price = Dividend/required rate of return

Discount the dividend to to its worth in year year 5

Price = 14/0.12= 116.666

Step  2

Discount the dividend to year o

Price of stock = 116.66× 1.12^(-5)= 66.19

Price of stock= $66.19

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