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The stock will pay a $20 dividends per year, but the first dividend will not be paid until 20 years from today. If you require a return of 8 percent on this stock, how much should you pay?

Valuing Preferred Stock:

I-Eyes.com has a new issue of perferred stock it calls 20/20 preferred. The stock will pay a $20 dividends per year, but the first dividend will not be paid until 20 years from today. If you require a return of 8 percent on this stock, how much should you pay?

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Expert Solution

It is important to know the terminology that is in the question. 

Preferred stock is stock with a priority status over common stockholders in one or more ways, such as paying dividends or distributing assets.  This means that preferred stockholders are given their dividends before any dividends are given to stockholders of common stock. 

Dividends are payments give to investors of stock after a certain period of time.

We should use the dividend growth model to get the answer.

Return = 8%

Dividend payout or yield = $20

$20 / 0.08 = 250

250 / (1+.08)19

250 / (1.08)19

250/ 4.315701059 = 57.9280

Price of Preferred stock =$57.93

The price you should pay to buy the preferred stock is  $57.93. 

Heidi Singh answered 2 years ago
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