The Fridge-Air Company's preferred stock pays a dividend of $4.50 per share annually. If the required rate of return on comparable quality preferred stocks is 14 percent, calculate the value of Fridge-Air's preferred stock. What fomula to use?
4.5/14%=$32.14
To calculate the value of Fridge-Air Company's preferred stock, we can use the formula for the present value of a perpetuity.
The formula to use is:
Value of Preferred Stock = Dividend / Required Rate of Return
Now, let's substitute the given values:
Dividend = $4.50 per share annually
Required Rate of Return = 14% or 0.14 (as a decimal)
Plugging these values into the formula, we get:
Value of Preferred Stock = $4.50 / 0.14
Calculating this using a calculator:
Value of Preferred Stock = $32.14 (rounded to the nearest cent)
Therefore, the value of Fridge-Air Company's preferred stock is approximately $32.14.