Question

Sunkwa Inc. just issued some new preferred stock. The issue will pay annual dividend of $13.20 per share in perpetuity, beginning 8 years from today. No dividend will be paid in the first 7 years. If the market requires a return of 7.43 percent on this investment, how much should a share of this preferred stock cost today

Answer 1

Answer:

107.57

Explanation:

Present value (PV) is the current value of a future sum of money or stream of cash flows given a specified rate of return. Future cash flows are discounted at the discount rate, and the higher the discount rate, the lower the present value of the future cash flows.

Preferred stock = Dividend/required rate

Preferred stock = 13.20/0.0743

Preferred stock = 177.658

Present value = P7/(1+required rate)^7

Present value = 177.658/(1+0.0743)^7

Present value = 107.57