An investor gathered the following data:

Par value of preferred stock offered with a 6% dividend rate $100

Company’s sustainable growth rate 5%

Yield on comparable preferred stock issues 11.5%

Investor’s marginal tax rate 30%

The value of the company’s preferred stock is closest to:

a.$96.92.

b.$54.78.

c.$52.17.

Answer is c as they use D0 (6/11.5%)=52.17 instead of D1 (6*1.05)/11.5%=54.78

Why is that? I read in the forum that the reason is that the growth is constant (?) and therefore 0 (/www.analystforum.com/t/when-to-use-gordon-growth-model/115119) but the rationale does not convince me…

In other instances we use the sustainable growth rate as basis to calculate the forward Dividend… so why not here?

Thanks