Question

In: Finance

Problem 8 A share of preferred stock has a par value of $100, an annual dividend...

Problem 8

A share of preferred stock has a par value of $100, an annual dividend of 2% and a current market price of $65.

Part 1

What is the rate of return on the preferred stock?

Expert Solution

Solution:

The formula for calculating Rate of Return on the Preferred Stock is

= Annual dividend per share / Current market price per share

As per the information given in the question we have

Par value of preferred stock = $ 100 ; Annual dividend rate per share = 2 % ;

Thus Annual dividend per share = Par value of preferred stock * Annual dividend rate per share

= $ 100 * 2 % = $ 2

Current market price per share = $ 65

Applying the above values in the formula we have the rate of return on preferred stock as

= $ 2 / $ 65

= 0.030769

= 3.0769 %

= 3.08 % ( when rounded off to two decimal places )

Thus the rate of return on the preferred stock is = 3.08 %

jeff jeffy answered 2 years ago

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