Question

Big Oil, Inc. has a preferred stock outstanding that pays an $7 annual dividend. If
investors' required rate of return is 10 percent, what is the market value of the shares?
If the required return declines to 6 percent, what is the change in the price of the stock?

Answer 1

The change in the price of the stock is $46.67.

How to calculate the change in price?

From the information given, the current price will be:

= Annual dividend / Required rate

= 7/0.1

= $70

The market value of the shares will be:

= 7/6%

= 7/0.06

= $116.67

Therefore, the change in the price of the stock will be:

= $116.67 - $70

= $46.67

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