Question

Preferred Products has issued preferred stock with an annual dividend of $7.30 that will be paid in perpetuity. a. If the discount rate is 10%, at what price should the preferred sell? (Round your answer to 2 decimal places.) Current price $ 73.00 b. At what price should the stock sell 1 year from now? (Round your answer to 2 decimal places.) Future price c. What are the (i) the dividend yield; (ii) the capital gains yield; (iii) the expected rate of return of the stock? (Enter your answers as a whole percent.) (i) (ii) (iii) Dividend yield Capital gains yield Expected rate of return

Answer 1

Value of Preferred Stock = Annual Dividend/Required rate of return

= 7.30/10%

= $73

b.Price after one year = Annual Dividend/Required rate of return

= 7.30/10%

= $73

c.Dividend yield = Dividend/Current Price

= 7.30/73

= 10%

Capital gains yield = (Price after one year – Current Price/Current Price

= (73-73)/73

= 0%

Expected Rate of return = Dividend yield + capital gains yield

= 10% + 0%

= 10%