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.
A)$0.39
B)$0.56
C)$31.82
D)$56.25
E)none of the above

Question

Quizplus · Accepted Answer

The constant growth dividend discount model (DDM) formula is as follows:

Intrinsic value of preferred stock = (Dividend / Required return)

where,

Dividend = $3.50 (as given in the problem) 
Required return = 11% (as given in the problem)

Plugging in the values, we get:

Intrinsic value of preferred stock = ($3.50 / 0.11) = $31.82

Therefore, the intrinsic value of the preferred stock is $31.82, which is closest to option C ($31.82).

A Preferred Stock Will Pay a Dividend of $3