Big Battery Car Company issued preferred stock that pays a $6.00 dividend every year in perpetuity. They...

Big Battery Car Company issued preferred stock that pays a $6.00 dividend every year in perpetuity. They just announced sales of their new car are not meeting analyst’s expectations. The Management has decided to stop paying common stock dividends for 6 years to reinvest earnings in new features. The market rate of return is 7.0%.

Expert Solution

Price at the end of 6th year = Perpetual dividend / Market return

= 6 / 0.07

= $ 85.7143

New price current = Price at the end of 6th year / ( 1 + Market rate )⁶

= 85.7143 / ( 1.07 )⁶

= $ 57.12 Answer

jeff jeffy answered 2 years ago

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