Question

What will be the nominal rate of return on a perpetual preferred stock with a $100 par value, a stated dividend of 10% of par, and a current market price of (a) $54.00, (b) $82.00, (c) $101.00, and (d) $148.00? Round your answers to two decimal places.

1. %
   
2. %
   
3. %
   
4. %

Answer 1

Solution:
a.	=18.52%
b.	=12.20%
c.	=9.90%
d.	=6.76%
Working Notes:
	Nominal rate of return on a perpetual preferred stock
	= Annual dividend / Current market price
Since	Stated dividend is 10%
	Means Annual dividend = 10% x Par value
	Annual dividend = 10% x $100
	Annual dividend = $10
So	Annual dividend all situation will remain same $10 per share
Hence	Nominal rate of return on a perpetual preferred stock
	= Annual dividend / Current market price
a.	When Current market price is $54.00
	Nominal rate of return
	'= Annual dividend / Current market price
	= $10/ $54.00
	=0.185185185
	=18.52%
b.	When Current market price is $82.00
	Nominal rate of return
	'= Annual dividend / Current market price
	= $10/ $82.00
	=0.12195122
	=12.20%
c.	When Current market price is $101.00
	Nominal rate of return
	'= Annual dividend / Current market price
	= $10/ $101
	=0.09900990
	=9.90%
d.	When Current market price is $148.00
	Nominal rate of return
	'= Annual dividend / Current market price
	= $10/ $148
	=0.06756757
	=6.76%
Please feel free to ask if anything about above solution in comment section of the question.