Question
John is considering investment in the preferred stock of Small Water. This preferred stock promises an annual dividend payment of $4. He requires 8% return
John is considering investment in the preferred stock of Small Water. This preferred stock promises an annual dividend payment of $4. He requires 8% return on investment. Unfortunately, the company suffered losses and has decided to suspend its preferred dividends for the next two years. The company says it expects to begin paying preferred dividends again three years from now. To make it up, the company will make a one time dividend payment of $12. $8 for the skipped years and $4 for the normal dividend in year 3. After that preferred shareholders will continue to receive the annual $4 dividend that they had come to expect.
Calculate the price of the preferred stock of Small Water. If John wants to invest $9500 now in the preferred stock of small water, how many preferred stocks can he purchase?
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