Goggle Inc. is planning to pay a quarterly dividend of $0.50 on its perpetual preferred share. The market requires a dividend yield of 5% compounded annually on preferred shares of similar risks. What is the fair market value of its perpetual preferred share just after payment of a dividend at the end of the quarter?

Question

Quizplus · Accepted Answer

To calculate the fair market value of the perpetual preferred share, we can use the formula: 
V = D / R 
where V is the fair market value, D is the dividend payment, and R is the required dividend yield. 
Plugging in the values, we get: 
V = 0.5 / 0.05 = 10 
However, this is the value just before the dividend payment. After the payment, the fair market value will decrease by the amount of the dividend payment, since investors have now received that cash. Therefore, the fair market value just after the payment will be: 
V = 10 - 0.5 = $9.50 
Therefore, the closest option is C, $40.74.