Molen Inc. has an outstanding issue of perpetual preferred stock with an annual dividend of $2.00 per share. If the required return on this preferred stock is 6.5%, then at what price should the stock sell

The price at which the preferred stock should sell for today is $30.77

Explanation:

The preferred stock pays a constant dividend/cash flow and after equal interval of time and has an infinite life. Thus, the perpetual preferred stock can be priced just like the perpetuity.  Th zero growth model of DDM or the perpetuity value today can be calculated using the follwoing formula,

P0 = D / r

Where,

D is the dividend

r is the required rate of return

P0 = 2 / 0.065  

P0 = $30.769 rounded off to $30.77

The price witch the preferred price is  $30.77

       Hope this helps! good luck :)

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