A firm issues preferred stock with a dividend of $2.75. If the appropriate discount rate is 10.27% what is the value of the preferred stock?

Answer 1

The value of preferred stock can be calculated using the formula for the present value of a perpetuity, since preferred stock typically pays a fixed dividend indefinitely. The formula is:

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

where:

• \( D \) is the annual dividend payment
• \( r \) is the discount rate (expressed as a decimal)

Given:

• \( D = 2.75 \)
• \( r = 10.27% = 0.1027 \)

Now, substituting the values into the formula:

\[ \text{Value of Preferred Stock} = \frac{2.75}{0.1027} \approx 26.85 \]

Thus, the value of the preferred stock is approximately $26.85.