Which of the following formulas is appropriate to find the value of preferred stock with a fixed dividend?
A) Value of preferred stock = Annual Preferred Stock Dividend (1+ growth rate)/Market's Required Yield on Preferred Stock
B) Value of preferred stock = Annual Preferred Stock Dividend (1+ growth rate)/Market's Required Yield on Preferred Stock - growth rate
C) Value of preferred stock = Annual Preferred Stock Dividend/Market's Required Yield on Preferred Stock
D) Value of preferred stock = Annual Preferred Stock Dividend/Investor's Required Yield on Preferred Stock

Question

Quizplus · Accepted Answer

The formula for finding the value of preferred stock with a fixed dividend is the annual preferred stock dividend divided by the market's required yield on preferred stock. This is because preferred stock dividends are fixed and do not grow, so there is no need to incorporate a growth rate in the formula. Option A includes a growth rate, which is not relevant for fixed dividend preferred stock. Option B subtracts the growth rate from the formula, but it is still unnecessary to include in the first place. Option D references the investor's required yield, which may differ from the market's required yield and is not as commonly used in valuation.

Which of the Following Formulas Is Appropriate to Find the Value