Farley Inc. has perpetual preferred stock outstanding that sells for $30 a share and pays a dividend of $4.00 at the end of each year. What is the required rate of return? Round your answer to two decimal places.
Price of the stock now = P = $30
Dividend Paid each year = D = $4
Let the required rate of return be r
The present value of the stock should be equal to the sum of present value of all future dividend payment
=> P = D/(1+r) + D/(1+r)2 + ..... = D/r
=> r = D/P = 4/30 = 0.1333 or 13.33%
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