Asked by Kaylyn Masters on Apr 27, 2024
Verified
A preferred stock will pay a dividend of $6.00 in the upcoming year and every year thereafter; i.e., dividends are not expected to grow. You require a return of 10% on this stock. Use the constant growth DDM to calculate the intrinsic value of this preferred stock.
A) $0.60
B) $6.00
C) $600
D) $60.00
E) None of the options are correct.
Constant Growth DDM
The Constant Growth Dividend Discount Model (DDM) is a method to value a company's stock by assuming constant growth in dividends per share and discounting them back to present value.
Intrinsic Value
Intrinsic value is the inherent, true value of an investment, regardless of its current market price.
Dividends
Distributions of earnings paid to shareholders by a company, typically out of its profits.
- Utilization of valuation principles for preferred stocks.
Verified Answer
SP
Shilvi PatelMay 03, 2024
Final Answer :
D
Explanation :
The intrinsic value of a preferred stock that pays a constant dividend can be calculated using the formula Price=Dr \text{Price} = \frac{D}{r} Price=rD , where DDD is the dividend and rrr is the required rate of return. Plugging in the values, Price=6.000.10=60.00 \text{Price} = \frac{6.00}{0.10} = 60.00 Price=0.106.00=60.00 .
Learning Objectives
- Utilization of valuation principles for preferred stocks.