Asked by Austin isaacs on May 11, 2024
Verified
A preferred stock will pay a dividend of $7.50 in the upcoming year and every year thereafter; i.e., dividends are not expected to grow. You require a return of 10% on this stock. Use the constant growth DDM to calculate the intrinsic value of this preferred stock.
A) $0.75
B) $7.50
C) $64.12
D) $56.25
E) None of the options are correct.
Constant Growth DDM
A dividend discount model that assumes dividends will continue to increase at a constant growth rate indefinitely, used to evaluate the price of a stock.
Preferred Stock
A class of ownership in a corporation that has a higher claim on assets and earnings than common stock, usually with fixed dividends and without voting rights.
- Compute the inherent worth of shares by applying dividend discount methodologies.
Verified Answer
LT
Liatnworc TakalpMay 14, 2024
Final Answer :
E
Explanation :
The constant growth Dividend Discount Model (DDM) formula, when dividends are not expected to grow (g = 0), simplifies to D/R, where D is the dividend and R is the required rate of return. Here, D = $7.50 and R = 10% or 0.10. Thus, the intrinsic value = $7.50 / 0.10 = $75. None of the provided options match this calculation.
Learning Objectives
- Compute the inherent worth of shares by applying dividend discount methodologies.