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

Question

Quizplus · Accepted Answer

The preferred stock price is calculated as the annual dividend divided by the required rate of return minus the growth rate. In this case, the annual dividend is $1.50, the required rate of return is 7%, and the growth rate is 5%. Therefore, the preferred stock price is $1.50 / (0.07 - 0.05) = $21.43.

An Issue of Preferred Stock Is Paying an Annual Dividend