Johnston Corporation is growing at a constant rate of 6 percent per year. It has both common stock and non-participating preferred stock outstanding. The cost of preferred stock (rps) is 8 percent. The par value of the preferred stock is $120, and the stock has a stated dividend of 10 percent of par. What is the market value of the preferred stock?
A) $125
B) $120
C) $175
D) $150
E) $200

Question

Quizplus · Accepted Answer

The market value of preferred stock is calculated by dividing the annual dividend by the cost of preferred stock. The annual dividend is 10% of the par value, which is $120, so the dividend is $12. The cost of preferred stock is 8%, so the market value is $12 / 0.08 = $150.

Johnston Corporation Is Growing at a Constant Rate of 6