Gap Inc. has outstanding nonconvertible preferred stock (cumulative) t

Gap Inc. has outstanding nonconvertible preferred stock (cumulative) that pays a quarterly dividend of $1.25. If your required rate of return is 9.5%, what should you be willing to pay for 1000 shares of the firm?

A) $52,631.58
B) $52,621.58
C) $52,611.58
D) $52,601.58

ANSWER

Answer: A
Explanation: A) This situation is that of a perpetuity without growth that has a quarterly required rate of return of = 0.02375. Thus, you should be willing to pay per share: P0 = = $52.631579. For 1000 shares, you should be willing to pay 1000 times this, or $52,631.58.