Answer: $2500
Explanation:
The value of a preferred stock that pays a perpetual dividend of $125 at the end of each year when the interest rate is 5 percent will be calculated by using the formula:
= Cf/i
where,
Cf = Cash flow = $125
i = Interest rate = 5% = 0.05
Therefore, the value of the preferred stock will be:
= Cf/i
= $125/0.05
= $2500
The value of the preferred stock is $2500.
