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In: Finance

What will be the nominal rate of return on a perpetual preferred stock with a $100...

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.

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Solutions

Expert Solution

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.

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