Graphical Designs is offering 1010 preferred stock The stock

Graphical Designs is offering 10-10 preferred stock. The stock will pay an annual dividend of $10 with the first dividend payment occurring 10 years from today. The required return on this stock is 5.35 percent. What is the price of the stock today?

$110.99

$186.92

$105.36

$108.18

$116.93

Solution

Price of the stock today = $116.93

Step 1

The Price of the Preferred stock is the Annual Dividend payment divided by the required rate of return. Here we know the annual dividend payment in Year 10, So we can calculate the Price of share in Year 9 which is calculated as follows

Price of share in Year 9 = Annual Dividend / Required rate of return

= $10 / 0.0535

= $186.92

Step 2

The Price of the stock today will be the present value of stock price in the Future Year

Therefore, Stock Price Today = Future Stock Price / (1+r)ⁿ

= $186.92 / (1.0535)⁹

= $186.92 / 1.598493

= $116.93