Question

Carby Hardware had an outstanding issue of perpetual preferred stock with an annual dividend of $6.50 per share. If the required return on this preferred stock is 6.5%, at what price should the preferred stock sell?

Answer 1

The price of a perpetual preferred stock is the present value of the annual payments in perpetuity.
Present value of a perpetuity = C/r
where C is the annual payment that is $6.50.
r is the required rate of return on the preferred stock that is 6.5%.
Present value of the perpetuity = 6.5/.065
Present value of the perpetuity = 100.
The preferred stock should sell at $100.