- CFA Exams
- CFA Level I Exam
- Topic 1. Quantitative Methods
- Learning Module 2. Time Value of Money in Finance
- Subject 3. Equity Instruments and the Time Value of Money

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**CFA Practice Question**

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

Correct Answer: A

A = (PV)(r) = (75.62)(0.04) = 3.02

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**User Contributed Comments**
5

User |
Comment |
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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. |