Asked by Salvador Ramirez on May 16, 2024
Verified
A preferred stock will pay a dividend of $1.25 in the upcoming year and every year thereafter; i.e., dividends are not expected to grow. You require a return of 12% on this stock. Use the constant growth DDM to calculate the intrinsic value of this preferred stock.
A) $11.56
B) $9.65
C) $11.82
D) $10.42
Constant Growth DDM
A valuation model for stocks that assumes dividends grow at a constant rate in perpetuity, used to calculate the present value of future dividend payments.
Intrinsic Value
The true, inherent, or fundamental value of an asset, based on both tangible and intangible factors, as opposed to its market price.
Dividends
Payments made by a corporation to its shareholder members, usually derived from the company's profits.
- Application of valuation principles to preferred stocks.
Verified Answer
AB
Andrea BlackMay 19, 2024
Final Answer :
D
Explanation :
The intrinsic value of a preferred stock using the constant growth Dividend Discount Model (DDM) when dividends do not grow is calculated as Dividend per share / Required rate of return. Thus, $1.25 / 0.12 = $10.42.
Learning Objectives
- Application of valuation principles to preferred stocks.