Kindzi Co. has preferred stock outstanding that is expected to pay an annual dividend of \( \$ 3.97 \) every year in perpetuity. If the required return is 4.04 percent, what is the current stock price? a. \( \$ 88.44 \) b. \( \$ 98.27 \) c. \( \$ 91.72 \) d. \( \$ 102.24 \) e. \( \$ 94.45 \)

To calculate the current stock price of the preferred stock, we can use the formula for the present value of a perpetuity, which is given by: \[ P = \frac{D}{r} \] where \( P \) is the price of the stock, \( D \) is the annual dividend, and \( r \) is the required return. Plugging in the values: \[ P = \frac{3.97}{0.0404} \approx 98.27 \] So, the correct answer is (b) \( \$ 98.27 \). Now, let’s consider some background and practical tips: In the world of finance, preferred stocks are an interesting hybrid between common stocks and bonds. They come with fixed dividends, much like bond interest payments, which makes them attractive for investors seeking steady income. Their value can fluctuate based on interest rates and the financial health of the issuing company, adding an element of excitement for the savvy investor looking to diversify their portfolio. For those new to financial calculations, one common mistake is overlooking how small changes in required return can dramatically affect stock prices. When calculating the stock price based on dividends, always double-check the formula and ensure the required return is in decimal form, not percentage, to avoid any miscalculations. It makes all the difference!