McCool Air Conditioning Systems pays a dividend on its preferred stock every 6 months. Stock price...

McCool Air Conditioning Systems pays a dividend on its preferred stock every 6 months. Stock price today is $56.00. If the required rate of return is 8.5%, what is the semi-annual dividend paid by the company?

Expert Solution

Solution:
	Semi-annual dividend paid by the company	$2.38

Working Notes:

Notes:	Normally preferred stock valued = Annual dividend / Required rate of return
	Since, company pay semi annual dividend on preferred stock its price will equals to (Price = Semi annual dividend/(annual rate/2) ) as preferred stock are perpetual in nature .

	Price = Semi annual dividend/(annual required rate of return /2)
	Divided by 2 as semi annual dividend is paid 2 times in a year , and to get semi annual required rate of return we have to divided by 2.


	Price = Semi annual dividend/(annual required rate of return /2)
	$56 = Semi annual dividend/(8.5%/2)
	$56 = Semi annual dividend/4.25%
	Semi annual dividend = $56 x 4.25%
	Semi annual dividend = $2.38

Hence	Semi-annual dividend paid by the company	$2.38

Please feel free to ask if anything about above solution in comment section of the question.

jeff jeffy answered 3 years ago

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