Question

ZZZ has preferred shares outstanding. The current price of each preferred share is $100 and it pays a dividend of $5 each year. What is the required rate of return on this stock, if the next dividend is going to be paid tomorrow? What if the most recent dividend was paid yesterday?

Answer 1

if dividend is due tomorrow

given, Current market price = $100

Dividend paid per year          =$5

required rate of return.

we know as per CAPM

Ke =   Dividend / Market price per share

     = 5 /100

     = 5%

the required rate of return on this stock is 5%

if dividend is paid yesterday.

Then the price of the share before paying the dividend will become the base for computation of our required rate of return.

Price before Payment of dividend =   price after payment + dividend

                                                 = 100 + 5

                                                = $105

Ke =   Dividend / Market price per share

     = 5 /105

     = 4.76%

the required rate of return on this stock is 4.76%