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Several years ago, Macro Riders issued preferred stock with a stated annual dividend of 5% of its $600 par value. Preferred stock of this type currently yields 10%. Assume dividends are paid annually. a. What is the estimated value of Macros preferred stock

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Answer: $300

Explanation:

The Value of a Preferred Stock is derived like a perpetuity in that it is calculated by dividing the annual cash return received by the annual yield/interest.

The stated annual dividend is 5% of $600;

= 5% * 600

= $30

Value of the Preferred Stock = [tex]\frac{Annual Cash Return}{Annual Yield}[/tex]

= [tex]\frac{30}{0.10}[/tex]

= $300