Please Help! Stocks /100 Points 60% Question 2 (of 10) Award: 0 out of 10.00 poi
ID: 2398221 • Letter: P
Question
Please Help! Stocks /100 Points 60% Question 2 (of 10) Award: 0 out of 10.00 points E-Eyes.com just issued some new preferred stock. The issue will pay a constant quarterly dividend of $3.50 in perpetuity, beginning exactly one quarter from now If the market requires an annual return of 13.00 percent with quarterly compounding. how much does a share of preferred stock cost today? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) Stock price $ 1.04 How much would a share of preferred stock cost today if the dividends begin exactly 6 years from now instead of next quarter? Don't forget that the PV formula for a perpetuity assumes the first payment is at the end of the first period. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g. 32.16.) Stock price $ 97.38 eBook & Resources eRook. 82 Some Ecatures of Ca
Explanation / Answer
1) Quarterly market return = Annual return/4 qtrs in a year
= 13%/4 Qtrs = 3.25%
Preferred Stock price today = Quarterly Dividend/Quarterly market return
= $3.50/0.0325 = $107.69
2) Total Qtrs in 6 yrs = 6 yrs*4 qtrs = 24 Qtrs
Preferred Stock price from 23 Quarters now = Quarterly dividend/Qtrly market return
= $3.50/0.0325 = $107.69
Preferred stock price today = Preferred Stock price from 23 Quarters now*[1/(1.0325)23]
= $107.69*0.47921 = $51.61