A preferred stock pays an annual dividend of $4.50.What is one share of this stock worth to you today if you require a rate of return of 11 percent?

Question

Quizplus · Accepted Answer

The value of the preferred stock can be calculated using the dividend discount model formula: 
PV = D / r 
where PV is the present value, D is the annual dividend, and r is the required rate of return. 
Plugging in the given numbers, we get: 
PV = 4.50 / 0.11 = $40.91 
Therefore, one share of the stock should be worth $40.91 to you today if you require a rate of return of 11 percent. 
Option D is the correct answer.

A Preferred Stock Pays an Annual Dividend of $4