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 can be calculated using the formula for the constant growth Dividend Discount Model (DDM) when the growth rate is zero: $P_0 = \frac{D}{r}$, where $P_0$ is the intrinsic value, $D$ is the dividend, and $r$ is the required rate of return. Plugging in the given values: $P_0 = \frac{3.00}{0.09} = 33.33$.

A Preferred Stock Will Pay a Dividend of $3