WHAT IS THE VALUE OF A $100 PAR PREFERRED STOCK THAT MUST BE RETIRED AFTER 10 YEARS IF IT PAYS A DIVIDEND OF $5 ANNUALLY AND THE INVESTOR REQUIRES A 6 PERCENT RATE OF RETURN

To determine the value of a preferred stock, we need to calculate the present value of all future dividends using the investor's required rate of return. Here's how you can calculate it step by step:

1. Determine the future dividend payments: The question states that the preferred stock pays a dividend of $5 annually and must be retired after 10 years. Therefore, there will be a total of 10 dividend payments over the 10-year period.

2. Calculate the present value of each dividend payment: To find the present value of each dividend payment, we need to discount it back to the present using the investor's required rate of return. The formula to calculate the present value of a single payment is:

Present Value = Dividend Payment / (1 + Required Rate of Return)^n

In this case, the Dividend Payment is $5, the Required Rate of Return is 6%, and n represents the number of years until the dividend is received.

Using this formula, we can calculate the present value of each individual dividend payment:

Year 1: $5 / (1 + 0.06)^1 = $4.72
Year 2: $5 / (1 + 0.06)^2 = $4.46
Year 3: $5 / (1 + 0.06)^3 = $4.21
... and so on, until year 10.

3. Sum up the present values of all dividend payments: Now that we have calculated the present value of each dividend payment, we need to sum them up to find the total present value of all future dividends. This can be done by adding up the present values of the individual dividend payments:

Total Present Value = Present Value of Year 1 + Present Value of Year 2 + ... + Present Value of Year 10

Calculate this sum using the values we obtained in step 2.

4. Add the present value of the final redemption value: Since the preferred stock must be retired after 10 years, there will be an additional redemption value to consider. In this case, the par value of the stock is $100, and we need to find the present value of this amount 10 years from now using the same formula as in step 2.

Present Value of Redemption Value = $100 / (1 + 0.06)^10

5. Calculate the total value of the preferred stock: To determine the total value of the preferred stock, we need to add the present value of all future dividend payments (from step 3) and the present value of the redemption value (from step 4).

Total Value = Total Present Value + Present Value of Redemption Value

Calculate this value using the numbers obtained in steps 3 and 4.

By following these steps and plugging in the appropriate values, you will be able to calculate the value of the $100 par preferred stock as requested.