Homework Chapter 8 Graded Homework Score 0 of 1 pt Problem 8

Homework: Chapter 8 Graded Homework Score: 0 of 1 pt Problem 8.LO2.25 (similar to) 1 of 18 (0 complete) A share of preferred stock has a par value of $20. It pays a 6% dividend. If the required return is 4%, what is the price of the stock? The preferred stock\'s price per share is S? (Round to the nearest cent)

Solution

Answer to Problem 8.LO2.25:

Par Value of Preferred Stock = $20

Annual Dividend = 6% * Par Value of Preferred Stock
Annual Dividend = 6% * $20
Annual Dividend = $1.20

Required Return = 4%

Current Price = Annual Dividend / Required Return
Current Price = $1.20 / 0.04
Current Price = $30

Answer to Problem 8.LO3.26:

Expected Dividend = $5.72
Growth Rate = 5%
Required Return = 9.6%

Current Price = Expected Dividend / (Required Return - Growth Rate)
Current Price = $5.72 / (0.096 - 0.05)
Current Price = $124.35