Question

What will be the nominal rate of return on a perpetual preferred stock with a $100 par value, a stated dividend of 10% of parA stock is expected to pay a dividend of $2.50 at the end of the year (i.e., D1 = $2.50), and it should continue to grow at a

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Answer #1

1.Annual dividend=100*10%=$10

Nominal rate of return=Annual dividend/Current value

a.Nominal rate of return=10/53=18.87%(Approx).

b.Nominal rate of return=10/88=11.36%(Approx).

c.Nominal rate of return=10/97=10.31%(Approx).

d.Nominal rate of return=10/137=7.30%(Approx).

2.

Current price=D1/(Required return-Growth rate)

=2.5/(0.13-0.03)

=$25

P3=Current price*(1+Growth rate)^3

=$25*(1.03)^3

=27.32(Approx).

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