Question

S08-22 Valuing Preferred Stock (LO1) E-Eyes.com 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? (Do not round Intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) Stock price

Answer 1

Annual Dividend = $20
Required Return = 5.65%

First dividend will be paid in 20 years from now

Stock Price = Present Value of Future Dividends
Stock Price = $20/1.0565^20 + $20/1.0565^21 + $20/1.0565^22 + …
Stock Price = $20 * (1/1.0565)^19 * (1 / 0.0565)
Stock Price = $20 * 6.229182
Stock Price = $124.58

Therefore, cost of preferred stock is $124.58 per share.