A $100 par, perpetual preferred share pays a fixed dividend of 5.0 percent. If the required rate of return is 6.5 percent, what is the current value of the shares?
yes correct answer but why not use below ? why am i confused here 100*e^ (.065-05)
That would be continuous compounding and perferred shares don’t work that way. They will pay a dividend once a year or semi-annually etc.
perpetual means it’s like an annuity that never stops LOL has nothing to do with contiuous pay like an index (even that is a little streched)
here is an easy way to remember it. you are paid $100*5%=$5 once a year. Required rate = discount rate -> Price of prefered share is equal to the present value of future cash flows = $5/(1+r) + $5/(1+r)^2+… = $5/r = $5/0.065=$76.92