In 2018, Montpelier Inc. issued a $100 par value preferred stock that pays a 9 percent annual dividend. Due to changes in the overall economy and in the company's financial condition, investors are now requiring a 10 percent return. What price would you be willing to pay for a share of the preferred if you receive your first dividend one year from now?

Question

Quizplus · Accepted Answer

The price of a preferred stock can be calculated using the formula: Price = Dividend / Required Rate of Return. Here, the annual dividend is 9% of the $100 par value, which is $9. With a required return of 10%, the price would be $9 / 0.10 = $90.