A firm issues preferred stock with a dividend of $3.73. If the appropriate discount rate is 8.33% what is the value of the preferred stock?

Answer 1

To determine the value of preferred stock, you can use the formula:

$$\text{Value of Preferred Stock}=\frac{D}{r}$$

where:

• $D$ is the dividend payment,
• $r$ is the discount rate (required rate of return).

In this case:

• $D=3.73$
• $r=0.0833$ (which is the decimal form of 8.33%)

Now, substituting in the values:

$$\text{Value of Preferred Stock}=\frac{3.73}{0.0833}$$

Calculating this gives:

$$\text{Value of Preferred Stock}=44.76$$

Therefore, the value of the preferred stock is approximately $44.76.