Avondale Aeronautics has perpetual preferred stock outstandingwith a par value of $100. The stock pays...

Avondale Aeronautics has perpetual preferred stock outstanding with a par value of $100. The stock pays a quarterly dividend of $2.00 and its current price is $120.

What is its nominal annual rate of return? Do not round intermediate calculations. Round your answer to two decimal places.
%
What is its effective annual rate of return? Do not round intermediate calculations. Round your answer to two decimal places.
%

Solutions

Expert Solution

a.Nominal annual rate of return = Preferred dividend/ Price of preferred stock

= $2*4 / $120

= $8 / $120

= 0.0667

= 6.67%.

b.The effective annual rate is calculated using the below formula:

Effective annual yield= (1+r/n)^n - 1

Where r is the interest rate and n is the number of compounding periods in one year.

Effective annual rate = (1+ 0.0667/4)^4 – 1

= 1.0684 - 1

= 0.0684*100

= 6.84%.

jeff jeffy answered 2 years ago

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