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The Jones Company has decided to undertake a large project. Consequently, there is a need for additional funds. The financial manager plans to issue preferred stock with a perpetual annual dividend of $5 per share and a par value of $30. If the required return on this stock is currently 20 percent, what should be the stock's market value?

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Nyctalus

Answer: $25

Explanation: Dividends are the returns the shareholders of the company get for investing the the company and bearing the risk and it is calculated as follows :-

Dividend = (value of share) * (rate of return)

Here we have,

Dividend = $5

rate of return = 20%

Therefore,

[tex]value\:of\:share\:=\:\frac{dividend}{rate\:of\:return}[/tex]

[tex]value\:of\:share\:=\:\frac{\$5}{20\%}[/tex]

                                = $25

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