Finance Help - Stock Price

Hockey_Guy14 · #1 $Old$ November 2nd, 2009, 06:29 PM

Benson Inc. just issued some new preferred stock. The issue will pay an $8 annual dividend in perpetuity, beginning 10 years from now. If the market requires a 15 percent return on this investment, how much does a share of preferred stock cost today?
Answer to 2 decimal places.

I have tried this several times but cant seem to get the right answer, could use some help.

colby2152 · #2 $Old$ November 2nd, 2009, 07:22 PM

Quote:

Originally Posted by Hockey_Guy14 $View Post$

Benson Inc. just issued some new preferred stock. The issue will pay an $8 annual dividend in perpetuity, beginning 10 years from now. If the market requires a 15 percent return on this investment, how much does a share of preferred stock cost today?
Answer to 2 decimal places.

I have tried this several times but cant seem to get the right answer, could use some help.

There appears to be lack of definitive information in this question, but I read it as a 10-year deferred perpetuity at 15%.

Perpetuity: $\ddot{a}_{\infty}=\frac{1}{i}=53.\bar{33}$

The present value factor (@ 15% because there is no other rate here) is: [math]v^{10}=(1.15)^{-10}=0.2472[/tex]

The product of these is the present value of this deferred annuity at $1: [tex]PV(_{|10}\ddot{a}_{\infty}}=0.2472*53.\bar{33}=13. 1832[/tex]

Multiply that by $8 for your final answer!

Hockey_Guy14 · #3 $Old$ November 2nd, 2009, 07:26 PM

Thanks