SOLUTION: Style Corporation preferred stock pays a dividen of $3.15 a year. What is the value of the stock if the required rate of return is 8.5%? (Round your answer to the nearest $1) A

Question 72879: Style Corporation preferred stock pays a dividen of $3.15 a year. What is the value of the stock if the required rate of return is 8.5%? (Round your answer to the nearest $1)

A. $23
B. $27
C. $33
D. $37

Answer by bucky(2189) (Show Source): You can put this solution on YOUR website!
You have invested a certain sum of money (unknown) and every year you collect 8.5% of that
investment as interest. So we can say that 8.5% of the sum (S) equals $3.15.
.
In equation form this becomes:
.

.
Notice that the decimal (0.85) is equivalent to 8.5%.
.
Solve this equation by dividing both sides by (0.085). When you do you get:
.

.
which simplifies to:
.

.
so and this rounds to $37.00. Answer D is the selection.
.
Hope this helps you to understand the problem a little better.
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