Pricing preferred stock is most similar to pricing ________.
A)constant growth common stock
B)a perpetuity
C)a zero-coupon bond
D)a three-month Treasury bill

Question

Quizplus · Accepted Answer

Preferred stock is a type of equity security that pays a fixed dividend, similar to a perpetuity which pays an infinite stream of fixed payments. Therefore, pricing preferred stock is most similar to pricing a perpetuity. Constant growth common stock is priced using the dividend discount model, which assumes a constant growth rate of dividends, making it a less similar option. Zero-coupon bonds and three-month Treasury bills are debt securities that pay a fixed amount at maturity and therefore are not similar to preferred stock.

Pricing Preferred Stock Is Most Similar to Pricing ________