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.