Question

CV preferred stock has a par value equal to $100 per share and pays an annual dividend equal to 8% of the par value. If investors require a 10 percent return to purchase CV’s preferred stock, what is the stock’s market value?

Answer 1

Answer:

The stock's market value per share is $80.

Explanation:

The preferred stock is just like a perpetuity as it has an indefinite life and pays a constant dividend/ cash flow through out. The formula for the value or current price of a perpetuity is,

V or P0 = Cash flow or Dividend  /  required rate of return

In this case, the dividend per share is paid at 8% of par value. Thus, dividend per share is 100 * 0.08 = $8 per share.

The required rate of return is 10%.

The current price or market value of this stock is,

V or P0 = 8 / 0.1  = $80