Question

A firm has a perpetual preffered stock that pays semi-annual dividends of $4.50. Its current price is $73.00. What is the rate of return and the effective annual rate? A.) r=12.33 EAR=12.07 B.) r=11.59 EAR=12.71 C.) r=13.22 EAR=12.72 D.) r=12.33 EAR=12.71 E.) r=12.33 EAR=13.22

Answer 1

Semi Annual dividend	4.50
Annual Dividend	9.00
Share Price	73
Share price=	Annual dividend/Effective rate
73=	9/effective rate
Effective rate=	9/73
Effective rate=	0.123287671
Effective rate=	12.33%
1+Effective rate=	(1+ nominal rate/2)^2
1.1232876=	(1+ nominal rate/2)^2
(1.1232876)^(1/2)=	(1+ nominal rate/2)
1.059852631	(1+ nominal rate/2)
0.05985	nominal rate/2
0.05985*2	nominal rate
Nominal Rate=	0.1197
Nominal Rate=	11.97%