Question

Kindzi Co. has preferred stock outstanding that is expected to pay an annual dividend of $4.74 every year in perpetuity. If the required return is 4.59 percent, what is the current stock price

Answer 1

Answer:

The price of the preferred stock today is $103.27

Explanation:

The preferred stock pays a constant dividend after equal intervals of time and has an indefinite maturity. Thus, a preferred stock is just like a perpetuity. The value or price of a perpetuity can be calculated using the following formula.

The price or a perpetuity:

P = Cash Flow / r

As the cash flow in this case is dividends so we will use dividends in place of cash flow and divide by the required rate of return.

P = 4.74 / 0.0459

P = $103.267 rounded off to $103.27