A preferred stock will pay a dividend of $3.00 in the upcoming year and every year thereafter; i.e., dividends are not expected to grow.You require a return of 9% on this stock.Use the constant growth DDM to calculate the intrinsic value of this preferred stock.

Question

Quizplus · Accepted Answer

The intrinsic value of the preferred stock is calculated using the formula for the constant growth Dividend Discount Model (DDM) when the growth rate is zero: $ \text{Price} = \frac{D}{r} $, where $D$ is the dividend and $r$ is the required rate of return. Substituting $D = 3.00$ and $r = 0.09$ gives $ \text{Price} = \frac{3.00}{0.09} = 33.33$.

A Preferred Stock Will Pay a Dividend of $3