In 2018, Smiths Corp. issued a $50 par value preferred stock that pays a 6 percent annual dividend. Due to changes in the overall economy and in the company's financial condition, investors are now requiring a 7 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. The annual dividend is 6% of the $50 par value, which equals $3. To find the price with a 7% required return, we use $3 / 0.07 = $42.86.