what is the value of a preferred stock when the dividend rate is 14% on a $100 value? the appropriate discount rate for a stock of this risk level is 12%
116.667
To calculate the value of a preferred stock, you can use the formula for the present value of a perpetual annuity. Here's how you can do it:
Step 1: Calculate the dividend payment. The dividend payment is calculated by multiplying the dividend rate by the stock's value. In this case, a 14% dividend rate on a $100 stock value would result in a dividend payment of $14.
Step 2: Determine the appropriate discount rate. In this case, the appropriate discount rate for a stock of this risk level is given as 12%.
Step 3: Use the formula for the present value of a perpetual annuity. The formula is:
Value = Dividend Payment / Discount Rate
Using the numbers from the previous steps, substituting them into the formula:
Value = $14 / 0.12
Step 4: Simplify the expression.
Value = $116.67
Therefore, the value of the preferred stock when the dividend rate is 14% on a $100 value, and the appropriate discount rate is 12%, is approximately $116.67.