Spiral Staircase is offering preferred stock which is referred to as 10-10 stock.This stock will pay an annual dividend of $10 a share starting 10 years from now.What is this stock worth to you today if you require a rate of return of 9.5 percent?

Question

Quizplus · Accepted Answer

The value of the stock today is the present value of the $10 dividend received annually starting 10 years from now. The present value of a perpetuity starting in the future is calculated by dividing the annual dividend by the required rate of return and then discounting it back to the present value. The formula is: PV = D / r * (1 / (1 + r)^n), where D is the dividend, r is the rate of return, and n is the number of years until the dividend starts. Plugging in the numbers: PV = $10 / 0.095 * (1 / (1 + 0.095)^10) = $46.51.

Spiral Staircase Is Offering Preferred Stock Which Is Referred to as 10-10