CFA Practice Question

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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?

A. $3.02
B. $78.64
C. infinite
Correct Answer: A

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

User Contributed Comments 5

User Comment
LondonBoy Remember to think of the dividend as a payment!. Divdend / r = PV
Amrokken Just looking at the 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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