Question

A preferred stock will pay a dividend of $3.00 in the upcoming year and every year thereafter; i.e., dividends are not expected to grow. You require a return of 9% on this stock. Use the constant growth DDM to calculate the intrinsic value of this preferred stock.
A) $33.33.
B) $0.27.
C) $31.82.
D) $56.25.

Answer 1

Answer:

Intrinsic value of this preferred stock. = $33.33

Explanation:

Given:

Dividend per year = $3

Required rate of return = 9%

Growth rate = 0

Find:

Intrinsic value of this preferred stock.

Computation:

Intrinsic value of this preferred stock. = D / (r - g)

Intrinsic value of this preferred stock. = $3 / (9% - 0)

Intrinsic value of this preferred stock. = $33.33

Answer 2

The Intrinsic value of the preferred stock is $33.33.

Given Information

Dividend per year = $3

Required rate of return = 9%

Growth rate = 0

 

Intrinsic value of this preferred stock. = D / (r - g)

Intrinsic value of this preferred stock. = $3 / (9% - 0)

Intrinsic value of this preferred stock. = $33.33

Hence, the Intrinsic value of the preferred stock is $33.33.

Therefore, the Option A is correct.

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