The Fridge-Air Company's preferred stock pays a dividend of $4.50 per annually. If the required rate of return on comparable quality stocks is 14 percent, calculate the value of Fridge-Air's preferred stock.
Assuming that there is no capital gains, the value of Fridge-Air's preferred stock value should be $32.14285714285714 or $32.14(2 decimal places).
$4.50 / 14% = $32.14285714285714
To calculate the value of Fridge-Air's preferred stock, you can use the formula for the present value of a perpetuity. The present value of a perpetuity is calculated by dividing the expected dividend payment by the required rate of return.
In this case, the dividend payment for Fridge-Air's preferred stock is $4.50 per year, and the required rate of return is 14 percent (or 0.14 as a decimal).
So, the value of Fridge-Air's preferred stock can be calculated as:
Value of stock = Dividend payment / Required rate of return
Value of stock = $4.50 / 0.14
Value of stock ≈ $32.14
Therefore, the value of Fridge-Air's preferred stock is approximately $32.14.