Achi Corp. has preferred stock with an annual dividend of $ 3.22. If the required return on Achi's preferred stock is 8.4 %, what is its price? (Hint: For a preferred stock, the dividend growth rate is zero.)

The price of the stock is $38.33

Explanation:

The dividend growth is zero on a preferred stock thus its dividends are just like a perpetuity as the stocks have no defined life. The formula for the price or value of a perpetuity or the zero growth model is,

P0 = D / r

Where,

D is the dividend

r is the required rate of return

Thus, the price of the stock is:

P0 = 3.22 / 0.084 = $38.33

Explanation:

The dividend growth rate can be defined as the annualized percentage change that an investment’s dividend undertakes during the span of a particular period of time. Growth rates can be based on whichever period and can be evaluated linearly by taking the average change over that particular period.

the step by step calculation can be seen below:

Required rate of return = ( D1 / P0) + g

P0 = D1 / Ke - g

Current price = $3.22 / 0.084 - 0

= $38.34

price of stock is $38.34

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