Ask Question
9 June, 07:48

E-Eyes just issued some new preferred stock. The issue will pay an annual dividend of $20 in perpetuity, beginning 20 years from now. If the market requires a return of 5.65 percent on this investment, how much does a share of preferred stock cost today

+4
Answers (1)
  1. 9 June, 09:08
    0
    Preferred stock costs $117.92 today

    Explanation:

    Preferred dividend are the fix amount payment which represents the perpetuity, the company can repurchase the preferred share as it is callable.

    The dividends of $20 represent a perpetuity beginning after 20 years. We have to discount all cash flows in the form of dividend for 20 years.

    Perpetuity = Cash flow / Rate of return = $20 / 5.65% = $20 / 0.0565 = 353.98

    Today's price = Perpetuity x (1 + r) - n = $353.98 x (1 + 0.0565) ^-20 = $117.92
Know the Answer?
Not Sure About the Answer?
Find an answer to your question ✅ “E-Eyes just issued some new preferred stock. The issue will pay an annual dividend of $20 in perpetuity, beginning 20 years from now. If ...” in 📘 Business if you're in doubt about the correctness of the answers or there's no answer, then try to use the smart search and find answers to the similar questions.
Search for Other Answers