E-Eyes.com has a new issue of preferred stock it calls 20/20 preferred. The stock will pay a $20 dividend per year, but the first dividend will not be paid until 20 years from today.
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| Required: |
If you require a return of 11.00 percent on this stock, how much should you pay today? (Do not round intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).)
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| Current stock price | $ |
Explanation:
Here, we have a stock that pays no dividends for 20 years. Once the stock begins paying dividends, it will have the same dividends forever, a preferred stock. We value the stock at that point, using the preferred stock equation. It is important to remember that the price we find will be the price one year before the first dividend, so:
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| P19 = D20 / R |
| P19 = $20 / .1100 |
| P19 = $181.82 |
The price of the stock today is simply the present value of the stock price in the future. We simply discount the future stock price at the required return. The price of the stock today will be:
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| P0 = $181.82 / 1.110019 |
| P0 = $25.03 |
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