Question

E-eyes.com has a new issue of preferred stock it calls 20/20 preferred. the stock will pay a $20 dividend per year, but the first dividend will not be paid until 20 years from today. the required return on the stock is 7.25 percent. what is the price of the stock 19 years from today

Answer 1

The price of the stock 19 years from now would be the present value of all the dividends to be paid starting year 20. Here, to compute the PV of the dividends, we can use the PV of perpetuity formula as the dividends will be paid for the infinite period of time.

Value of the stock after 19 years = Dividend year 20/ required return

= $20 / 0.0725

= $275.86