What is the value of a preferred stock that pays a perpetual

What is the value of a preferred stock that pays a perpetual dividend of $145 at the end of each year when the interest rate is 7 percent?

Solution

DEFINITION of \'Preferred Stock\'

A class of ownership in a corporation that has a higher claim on its assets and earnings than common stock. Preferred shares generally have a dividend that must be paid out before dividends to common shareholders, and the shares usually do not carry voting.

Preferred shareholders have priority over common stockholders when it comes to dividends, which generally yield more than common stock and can be paid monthly or quarterly. These dividends can be fixed or set in terms of a benchmark interest rate like the LIBOR. Adjustable-rate shares specify certain factors that influence the dividend yield, and participating shares can pay additional dividends that are reckoned in terms of common stock dividends or the company\'s profits.

Preferred stock combines features of debt, in that it pays fixed dividends, and equity, in that it has the potential to appreciate in price. The details of each preferred stock depend on the issue.

So the value of preferred stock is Fixed amount $145 at the end of each year and 7% interest rate for each year.