Question

The preferred stock of Denver Savings and Loan pays an annual dividend of $5.70. It has a required rate of return of 6 percent. Compute the price of the preferred stock.

Short answer

The price of preferred stock is computed as $95

Step-by-step solution

Definition of dividend

The dividend is defined as the part of the profit which the company distributes to its preferred and common shareholders. Dividends can be in the form of cash or stock.

Computation of the current price of preferred stock

$\begin{array}{rcl}\mathbf{Price}\mathbf{}\mathbf{of}\mathbf{}\mathbf{Preferred}\mathbf{}\mathbf{Stock}& \mathbf{=}& \frac{\mathbf{Dividend}}{\mathbf{New}\mathbf{}\mathbf{Rate}\mathbf{}\mathbf{of}\mathbf{}\mathbf{return}}\\ & \mathbf{=}& \frac{\mathbf{5}\mathbf{.}\mathbf{70}}{\mathbf{0}\mathbf{.}\mathbf{06}}\\ & \mathbf{=}& \mathbf{\$}\mathbf{95}\end{array}$