Question

What will be the nominal rate of return on a perpetual preferred stock with a $100 par value, a stated dividend of 11% of par, and a current market price of (a) $66, (b) $84, (c) $101, and (d) $142? Round your answers to two decimal places.

1.   %
   

2.   %
   

3.   %
   

4.   %

Answer 1

The rate of return is computed as follows:

= Dividend / current market price

a. The rate is computed as follows:

= ($ 100 x 11%) / $ 66

= $ 11 / $ 66

= 16.67%

b. The rate is computed as follows:

= ($ 100 x 11%) / $ 84

= $ 11 / $ 84

= 13.10%

c. The rate is computed as follows:

= ($ 100 x 11%) / $ 101

= $ 11 / $ 101

= 10.89%

d. The rate is computed as follows:

= ($ 100 x 11%) / $ 142

= $ 11 / $ 142

= 7.75%