Question

et - myUVM * Course Materials - 201909-91 * Gove_Thorblad_Movie_Exibit * El Chapter 9 Home newconnect.mheducation.com/flow/connect.html?returnUrl https%3A%2F%2Fconnect.mheducation E G Google Get Started at UV.. Capsim Portal Connect - Sign in Harvard Business.. Chapter 9 Homework Check 5 ) radom arte vel Problem 9-19 Valuing Preferred Stock F 10 points ifth National Bank just issued some new preferred stock. The issue will pay an annual dividend of $19 in perpetuity, beginning 8 years from now. If the market requires a return of 33 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.) 216 ® Answer is complete but not entirely correct. Stock price $ 444.06

Answer 1

The price of a share of preferred stock is the dividend payment divided by the required return. We know the dividend payment in Year 8, so we can find the price of the stock in Year 7, one year before the first dividend payment. Doing so, we get:

P₇ = $19 / 0.033

P₇ = $575.76

The price of the stock today is the PV of the stock price in the future, so the price today will be:

P₀ = $575.76 / (1.033)⁷

P₀ = $458.71