The value of a preferred stock that pays a fixed dividend every year forever can be calculated using the formula for a perpetuity:

$\text{Value of Perpetuity} = \frac{D}{r}$

Where:

• $D$ is the annual dividend payment,
• $r$ is the annual interest rate (expressed as a decimal).

Given:

• $D = 700$ dollars,
• $r = 12\% = 0.12$.

Now, plug the values into the formula:

$\text{Value of Stock} = \frac{700}{0.12} = 5833.33$

So, the value of the preferred stock is $5833.33.

Would you like more details or have any questions?

Here are 5 relative questions to expand on this:

1. How does the value of the stock change if the interest rate increases to 15%?
2. What happens to the value of the stock if the dividend payment decreases to $600?
3. Can this formula be used for common stocks as well? Why or why not?
4. How would inflation affect the valuation of this preferred stock?
5. What is the difference between perpetuities and annuities?

Tip: Always express the interest rate as a decimal when calculating perpetuities (e.g., 12% becomes 0.12).