EXAMPLEPREFERRED STOCK $($Section $9-8)$

A special case of the constant growth model is a stock with a zero growth rate. Such a stock is a

preferred stock, which pays a constant dividend in perpetuity. Perpetuity valuation was discussed

in Chapter $5,$ and the formula is simply $V=$ Cash flow $/$ Required return.

EXAMPLE

A perpetual preferred stock pays a $$10$ annual dividend and has a required return of $10\mathrm{.}3\%.$ What

is its value?

A company just paid a $$1\mathrm{.}00$ dividend, and it is expected to grow at $10\%$ for the next $3$ years. After

$3$ years the dividend is expected to grow at the rate of $4\%$ indefinitely. If the required return is

$9\%,$ what is the stock's value today?