A preferred stock will pay a dividend of $1.25 in the upcoming year and every year thereafter; i.e., dividends are not expected to grow.You require a return of 12% 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: Price = Dividend / Required Rate of Return. Here, it is $1.25 / 0.12 = $10.42.

A Preferred Stock Will Pay a Dividend of $1