Question

​(Preferred stockholder expected return​) You own 200 200 shares of Dalton Resources preferred​ stock, which currently sells for $ 39.85 $39.85 per share and pays annual dividends of $ 2.25 $2.25 per share. a. What is your expected​ return? b. If you require a return of 11 11 ​percent, given the current​ price, should you sell or buy more​ stock?

Answer 1

(1)-The expected rate of return on the Preferred stock

The expected rate of return on the Preferred stock is calculated by using the following formula

The expected rate of return on the Preferred stock = [Annual preferred dividend per share / Selling price per share] x 100

= [$2.25 / $39.85] x 100

= 5.65%

(2)-The Price of the preferred stock if the required rate of return is 11.00%

The Price of the Preferred Stock = Annual Preferred Dividend / Required rate of return

= $2.25 per share / 0.11

= $20.45

“Therefore, we should buy more stocks, since the price of the preferred stock at the required rate of return is 11.00% ($20.45) is lower than the current selling price of the bond ($39.85).