In 2018, Venus Fly Co. issued a $75 par value preferred stock that pays a 7 percent annual dividend. Due to changes in the overall economy and in the company's financial condition investors are now requiring a 5 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 7% of the $75 par value, which is $5.25. The required rate of return is now 5%. Therefore, the price = $5.25 / 0.05 = $105.