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Basic Question 5 of 6
A share of preferred stock pays a specific dividend on a specific schedule for as long as the issuing company exists. Assume that a share of preferred stock pays an annual per-share dividend at the end of each year. The present value of this share of preferred stock is $75.62. Assume that the company paying the dividends will exist forever. If the dividends can be invested at 4% per year, what is the amount of each dividend?
B. $78.64
C. infinite
A. $3.02
B. $78.64
C. infinite
User Contributed Comments 5
| User | Comment |
|---|---|
| LondonBoy | Remember to think of the dividend as a payment!. Divdend / r = PV |
| Amrokken | Just looking at the figures...no need for calculation |
| cschulz316 | The figures on the actual exam won't be so easy to distinguish. That's why these are "BASIC" questions. Learn to calculate |
| denisw123 | what does the rate at which a dividend can be reinvested have to do with the size of the dividend itself? These are two separate transactions, no? Maybe the dividend only yields 2% so the shareholder reinvests it somewhere else for 4%. They may be holding this stock as a growth stock that offers a small dividend, not exclusively for the dividend itself. |
| gtokarz | This question was worded poorly but I guess that was the trick. Sure the dividend can be invested at 4% a year but it simply asks for the amount so it's a simple calc. |
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Learning Outcome Statements
calculate and interpret the present value(PV) of fixed-income and equity instruments based on expected future cash flows
calculate and interpret the implied return of fixed-income instruments and required return and implied growth of equity instruments given the present value (PV) and cash flows
CFA® 2025 Level I Curriculum, Volume 1, Module 2.