Question

You just purchased preferred shares in Initech for $45.71. Initech pays annual dividends of $0.64. What is your required return on this investment?

What is the formula for solving this in excel?

Answer 1

1:
The dividends payment for preferred stocks is normally fixed. There is no growth in the dividends. As there is no growth, we can value a preferred stock as constant growth stock. The growth rate is taken as zero as there is no growth in dividend.
formula used for rate of return = Dividend payment/Price of the preferred stock + growth rate

As, growth rate is zero, rate of return=Dividend payment/Price of the preferred stock

Here, dividend payment is $0.64 and buy price of the preferred stock is $45.71
Required return is 0.64/45.71=.014=1.4%

2: We can take the dividend payment and price of the preferred stock in excel and use the formula rate of return = Dividend payment/Price of the preferred stock in excel to arrive at the solution value.