(Preferred stock expected return) You are considering the purchase of 150 150 shares of preferred stock....
(Preferred stock expected return) You are considering the purchase of 150 150 shares of preferred stock. Your required return is 11 11 percent. If the stock is currently selling for $ 35 35 and pays a dividend of $ 4.50 4.50, should you purchase the stock? a. What is the expected rate of return of the stock?
Homework Answers
(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
= [$4.50 / $35.00] x 100
= 12.86%
(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
= $4.50 per share / 0.11
= $40.91
“We should not buy more stocks, since the price of the preferred stock at the required rate of return is 11.00% ($40.91) is higher than the current selling price of the bond ($35.00)”
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