Please Help with Finance Question!?

Asked by “blondiedog”

An issue of preferred stock is paying an annual dividend of $5. The growth rate for the firm’s common stock is 14%. What is the preferred stock price if the required rate of return is 11%?

  • A) $45.45
  • B) $41.67
  • C) $35.71
  • D) $30.12


The answer is A. The question is trying to confuse you by giving you too much information. We don’t care what the common stock is doing so forget the growth of 14%. All we care about is the preferred annual dividend. Since the annual dividend is constant and the same, we can use the present value of a perpetuity (sounds hard, but it isn’t)

PV = pmt / discount rate


Intrinsic Value (of preferred stock in this case) = dividend / discount rate

Intrinsic Value = $5 / 0.11

Intrinsic Value = $45.45

See we don’t want to by this preferred stock unless we can get at least an 11% return off of it. So what price will a $5 dividend yield an 11% return?

Payment / Price = Yield

$5 / $45.45 = .11 (or 11%)

So there you have it, $45.45


David Lin, Professeur

“A) $45.45”


By Alexandre Laurent

Alexandre Laurentl is working in the jewelry and investment gold since 2002. Alexandre graduated from The Normandy School of Business and from the University of Perpignan a Bachelor of economics in 1995.

Leave a Reply

Your email address will not be published. Required fields are marked *