A preferred stock will pay a dividend of $1.25 in the upcoming year and every year thereafter; i.e., dividends are not expected to grow. You require a return of 12% on this stock. Use the constant growth DDM to calculate the intrinsic value of this preferred stock.

Question

Quizplus · Accepted Answer

The intrinsic value of a preferred stock using the constant growth Dividend Discount Model (DDM) when dividends do not grow is calculated as Dividend per share / Required rate of return. Thus, $1.25 / 0.12 = $10.42.

A Preferred Stock Will Pay a Dividend of $1