Electric Utilities preferred stock will pay an annual dividend of $12 per share in perpetuity beginning 8 years from now. What is one share of this stock worth today if the market requires a return of 9.5 percent?

Question

Quizplus · Accepted Answer

The value of a perpetuity is calculated using the formula $ \frac{D}{r} $, where $D$ is the annual dividend and $r$ is the required rate of return. In this case, $D = $12$ and $r = 9.5\% = 0.095$, so the value of the perpetuity starting 8 years from now is $ \frac{$12}{0.095} = $126.32 $. To find the present value of this amount 8 years from now, we discount it back to the present using the formula $ \frac{PV}{(1 + r)^n} $, where $PV$ is the future value, $r$ is the rate, and $n$ is the number of periods. Plugging in the values, we get $ \frac{$126.32}{(1 + 0.095)^8} \approx $66.92 $.

Electric Utilities Preferred Stock Will Pay an Annual Dividend of $12