Asked by Sabrina Mitchell on Apr 29, 2024
Verified
A preferred stock will pay a dividend of $3.50 in the upcoming year and every year thereafter; i.e., dividends are not expected to grow. You require a return of 11% on this stock. Use the constant growth DDM to calculate the intrinsic value of this preferred stock.
A) $0.39
B) $0.56
C) $31.82
D) $56.25
Constant Growth DDM
A valuation model that estimates the value of a dividend-paying stock by using predicted dividends that grow at a constant rate in perpetuity.
Intrinsic Value
The inherent or true value of a security, based on underlying assets and earnings, independent of its market value.
Dividends
Payments made by a corporation to its shareholder members, typically derived from the company's profits.
- Implementing valuation principles on preferred shares.
Verified Answer
ZK
Zybrea KnightMay 04, 2024
Final Answer :
C
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. Therefore, $3.50 / 0.11 = $31.82.
Learning Objectives
- Implementing valuation principles on preferred shares.