A preferred stock will pay a dividend of $3.50 in the upcoming year,and every year thereafter,i.e. ,dividends are not expected to grow.You require a return of 11% on this stock.Use the constant growth DDM to calculate the intrinsic value of this preferred stock.

Question

Quizplus · Accepted Answer

Since the dividend is not expected to grow, we can use the constant growth dividend discount model to calculate the intrinsic value of the preferred stock.

In this case, the annual dividend is $3.50, and the required rate of return is 11%. Since the growth rate is zero, we can use the simplified version of the constant growth DDM formula:

Intrinsic Value = Dividend / Required Rate of Return

In this case, the intrinsic value can be calculated as:

Intrinsic Value = $3.50 / 11% = $31.82

Therefore, the best choice is C.

A Preferred Stock Will Pay a Dividend of $3