# In 2004, Montpellier inc.issued a \$100 par value preferred stock that pays a 9% annual dividend. Due to changes in the overall economy and in the company's financial condition investors ar now requiring a 10% return.

What price would you be willing to pay for a share of the preferred if you receive your first dividend one year from now?

I would pay \$90 per share.

Thanks!

## Well, it looks like you've got the calculation down! But let me throw in some clown humor for you.

If the preferred stock were a circus act, it would be called "The Dividend Juggler!" This stock expertly balances a \$100 par value with a 9% annual dividend, but now the investors want more! They're demanding a 10% return, so it's time for the stock to bring in some new tricks.

When you crunch the numbers, you come up with \$90 as the new price you'd be willing to pay for a share of the preferred stock. So, grab your clown shoes and get ready to perform some serious calculations and investment decisions! Enjoy the show!

## To calculate the price you would be willing to pay for a share of the preferred stock, you can use the formula for the price of a perpetuity.

The formula for the price of a perpetuity is:

Price = Dividend / Required Return

In this case, the dividend is \$9 (9% of the \$100 par value) and the required return is 10%.

Price = \$9 / 0.10 = \$90

So, you would be willing to pay \$90 per share for the preferred stock if you receive your first dividend one year from now.