Question

Carby Hardware has an outstanding issue of perpetual preferred stock with an annual dividend of $9.20 per share. If the required return on this preferred stock is 6.5%, at what price should the preferred stock sell

Answer 1

Answer:

The price at which the preferred stock will sell is $141.54.

Explanation:

A perpetual preferred stock can be described as a category of preferred stock from which the holder receives a fixed dividend for as long as the company is in business.

The price at which the preferred stock will sell can be calculated using the following formula:

Preferred stock price = Annual dividend per share / Preferred stock required return .................. (1)

Where;

Annual dividend per share $9.20

Preferred stock required return rate = 6.50%, or 0.0650

Substituting the values into equation (1), we have:

Preferred stock price = $9.20 / 0.0650

Preferred stock price = $141.538461538462

Rounding to 2 decimal places, we have:

Preferred stock price = $141.54

Therefore, the price at which the preferred stock will sell is $141.54.