A preferred stock will pay a dividend of $2.75 in the upcoming year and every year thereafter; i.e., dividends are not expected to grow.You require a return of 10% on this stock.Use the constant growth DDM to calculate the intrinsic value of this preferred stock.

Question

Quizplus · Accepted Answer

The constant growth DDM formula is V = D / r-g, where V is the intrinsic value, D is the expected dividend, r is the required return, and g is the expected growth rate (which is assumed to be 0 in this case since dividends are not expected to grow). Plugging in the given values, we get V = 2.75 / 0.10-0 = 27.50. Therefore, the intrinsic value of this preferred stock is $27.50.

A Preferred Stock Will Pay a Dividend of $2