A share of preferred stock pays a $2.00 quarterly dividend. Comparable investments should earn 8% compounded quarterly. The preferred should sell for $100.

Question

Quizplus · Accepted Answer

To determine if the preferred stock should sell for $100, we need to calculate the present value of its future dividend payments. Using the formula for present value of an annuity, we get:

PV = (dividend payment / interest rate per period) * (1 - 1 / (1 + interest rate per period)^number of periods)

PV = ($2.00 / 0.02) * (1 - 1 / (1 + 0.02)^4)

PV = $96.08

Since the calculated present value is less than $100, the preferred stock should sell for less than $100. Therefore, the statement is false.

A Share of Preferred Stock Pays a $2