Question

In: Finance

A preferred stock with a $25 par value pays an annual dividend of 8% and is...

A preferred stock with a $25 par value pays an annual dividend of 8% and is currently trading for $18 per share. What is the annualized return being demanded by investors?

AT&T stock (T) just paid an annual dividend of $1.75 for the most recent year. The current stock price is $38. Assuming investors expect a constant growth rate in dividends of 6% into perpetuity, what is the implied required return being demanded by investors?

Expert Solution

Solution:

Current price = $18

Par value = $25

Annual dividend = 8%

Dividend amount = $25*8%= $2

Annual return = Dividend / current price

Annual return = $2/$18= 0.1111

Annual return = 11.11%

Recent dividend ( D0) = $1.75

Current share price ( P0) =$38

Growth rate(g)= 6%

Next expected dividend ( D1) =$ 1.75*( 1+0.06)= $1.855

Required return =( D1/ P0)+g

Required return =.( 1.855/38)+0.06

Required return= 0.1088 or 10.88%

.

jeff jeffy answered 2 years ago

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