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11 April, 12:28

Molen Inc. has an outstanding issue of perpetual preferred stock with an annual dividend of $2.00 per share. If the required return on this preferred stock is 6.5%, then at what price should the stock sell

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  1. 11 April, 12:49
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    The price at which the preferred stock should sell for today is $30.77

    Explanation:

    The preferred stock pays a constant dividend/cash flow and after equal interval of time and has an infinite life. Thus, the perpetual preferred stock can be priced just like the perpetuity. Th zero growth model of DDM or the perpetuity value today can be calculated using the follwoing formula,

    P0 = D / r

    Where,

    D is the dividend

    r is the required rate of return

    P0 = 2 / 0.065

    P0 = $30.769 rounded off to $30.77
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Home » Business » Molen Inc. has an outstanding issue of perpetual preferred stock with an annual dividend of $2.00 per share. If the required return on this preferred stock is 6.5%, then at what price should the stock sell
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