A preferred stock issued by AT&T Corporation pays $2.25 per year, your required rate of return is 8%, how much would you pay per share to purchase this preferred stock?
Solution:
The formula for calculating the Required Rate of Return on Investment in Preferred Stock is
Required Rate of Return = Annual dividend / Purchase price
As per the information given in the question we have
Annual dividend per share = $ 2.25 ; Required Rate of Return = 8 % = 0.08
Applying the above values in the formula we have
0.08 = $ 2.25 / Purchase price
0.08 * Purchase price = $ 2.25
Purchase price = $ 2.25 / 0.08
Purchase price = $ 28.1250
Purchase price = $ 28.13 ( when rounded off to two decimal places )
Thus the Purchase price of the preferred stock is = $ 28.13
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