Asked by Mariela Arches on Jul 01, 2024
Verified
Confectioners' Corner wants to offer some preferred stock that pays an annual dividend of $4.50 a share. The company has determined that stocks with similar characteristics provide an 11% rate of return. What price should Confectioner's expect to receive per share for this stock offering?
A) $38.87
B) $40.54
C) $40.91
D) $45.50
E) $49.50
Annual Dividend
The total dividend payment a shareholder receives from a company per share over a one-year period.
Rate Of Return
A metric used to evaluate the efficiency of an investment, calculated by dividing the profit or loss of the investment by its initial cost.
Stock Offering
The process by which a company issues shares of its stock to raise capital, either through an initial public offering (IPO) or a secondary offering.
- Evaluate the comparative valuation of common versus preferred stock.
Verified Answer
BG
Brittany GregoryJul 06, 2024
Final Answer :
C
Explanation :
The price of the preferred stock can be calculated using the formula for the value of a perpetuity: Price = Dividend / Rate of Return. Plugging in the values gives Price = $4.50 / 0.11 = $40.91.
Learning Objectives
- Evaluate the comparative valuation of common versus preferred stock.