The First Bank of Ellicott City has issued perpetual preferred stock with a $100 par value. The bank pays a quarterly dividend of $1.65 on this stock. What is the current price of this preferred stock given a required rate of return of 13.0 percent?

Question

The First Bank of Ellicott City has issued perpetual preferred stock with a $100 par value. The bank pays a quarterly dividend of $1.65 on this stock. What is the current price of this preferred stock given a required rate of return of 13.0 percent?

Answer 1

.13p = 1.65

.13p/.13 = 1.65/.13
P = 12.69

Answer 2

First not correct

4(1.65)/.13
6.60/.13
= $50.77

Answer 3

4(1.65)/.13

6.60/.13
= $50.77

Answer 4

To calculate the current price of the preferred stock, we need to use the dividend discount model (DDM). The DDM formula is:

Price = Dividend / Required Rate of Return

In this case, the dividend is the quarterly dividend, which is $1.65. However, we need to convert it to an annual dividend by multiplying it by 4 (since there are 4 quarters in a year). So the annual dividend is 4 * $1.65 = $6.60.

The required rate of return is 13.0 percent, which we need to convert to a decimal by dividing it by 100. So the required rate of return is 0.13.

Now we can calculate the price of the preferred stock:

Price = $6.60 / 0.13 = $50.77

Therefore, the current price of the preferred stock is approximately $50.77.