EEyescom has a new issue of preferred stock it calls 2020 pr

E-Eyes.com has a new issue of preferred stock it calls 20/20 preferred. The stock will pay a $20 dividend per year, but the first dividend will not be paid until 20 years from today. Required: If you require a return of 8 percent on this stock, how much should you pay today? (Do not round intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).) Current stock price

Solution

Value as on year 20=Annual dividend/Required return

=$20/0.08

=$250

Hence current value=Value as on year 20*Present value of discounting factor(rate%,time period)

=$250/1.08^19

=$250*0.231712064

=$57.93(Approx).