Q. A perpetual preferred stock makes its first quarterly dividend payment of $2.00 in five quarters. If the required annual rate of return is 6% compounded quarterly, the stock’s present value is closest to:
B is correct. The value of the perpetuity one year from now is calculated as:
PV = A/r, where PV is the present value, A is the annuity, and r is expressed as a quarterly required rate of return because the payments are quarterly.PV = $2.00/(0.06/4)PV = $133.33.
The value today is (where FV is future value) PV = FV N*(1 + _ r )– N; _ PV = $133.33(1 + 0.015)–4;
PV = $125.62 ≈ $126.
Question: I am confused about why we discount only 4 periods instead of 5 periods in the last step? Can someone help please?