An issue of preferred stock is paying an annual dividend of $1.50. The growth rate for the firm's common stock is 5%. What is the preferred stock price if the required rate of return is 7%?
A)$21.43
B)$30.00
C)$22.50
D)None of these options

Question

Quizplus · Accepted Answer

The preferred stock price is calculated as the present value of the future dividends, discounted at the required rate of return. The annual dividend is $1.50, the growth rate is 5%, and the required rate of return is 7%. The preferred stock price is:$$P = \frac{D}{r - g} = \frac{1.50}{0.07 - 0.05} = 21.43$$

An Issue of Preferred Stock Is Paying an Annual Dividend