Question

What is the value of a preferred stock that pays a perpetual dividend of $125 at the end of each year when the interest rate is 5 percent?

Short answer

The wanted value is $2,500.

Step-by-step solution

Introduction

We use the following formula to get the preferred stock :

$P{V}_{preferredstock}=\frac{CF}{i}$

Where$P{V}_{preferredstock}$is the present value of the preferred stock, CF is the cash flow and I is the interest rate.

Finding the value of a preferred stock.

With the given$CF=\$125$and$i=5\%.$

$i=5\%=0.05.$

We substitute all the given numbers to the given formula:

$P{V}_{perferredstock}=\frac{\$125}{0.05}=\$2500$

Therefore the value for the preferred stock is $2500.