A preferred stock will pay a dividend of $3.00 in the upcoming year and every year thereafter; i.e., dividends are not expected to grow. You require a return of 9% on this stock. Use the constant growth DDM to calculate the intrinsic value of this preferred stock.

A) $33.33
B) $0.27
C) $31.82
D) $56.25

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Taylor Nelson · Accepted Answer

Final Answer : A, Explanation :   The intrinsic value of the preferred stock can be calculated using the formula for the constant growth Dividend Discount Model (DDM) when the growth rate is zero:   P 0 = D r P_0 = \frac{D}{r} P 0 ​ = r D ​  , where   P 0 P_0 P 0 ​   is the intrinsic value,   D D D   is the dividend, and   r r r   is the required rate of return. Plugging in the given values:   P 0 = 3.00 0.09 = 33.33 P_0 = \frac{3.00}{0.09} = 33.33 P 0 ​ = 0.09 3.00 ​ = 33.33  .

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A preferred stock will pay a dividend of $3.00 in the upcoming year and every year thereafter; i.e., dividends are not expected to grow. You require a return of 9% on this stock. Use the constant growth DDM to calculate the intrinsic value of this preferred stock.A) $33.33B) $0.27C) $31.82D) $56.25

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