Question

Bruner aeronautics has perpetual preferred stock outstanding with par value of 100. the stock pays a quarterly dividend of 2 and its current price is 80

Answer 1

Preferred stock returns Bruner Aeronautics has perpetual preferred stock outstanding with a par value of $100. The stock pays a quarterly dividend of $2 and its current price is $80. a. What is the stock’s value? b. What is its effective annual rate of return.

solution:

Nominal rate of return = $8/$80

= 10%.

Or alternatively, you could determine the security’s periodic return and multiply by 4.

Periodic rate of return = $2/$80

= 2.5%.

Nominal rate of return = 2.5% ? 4

= 10%.

b. EAR = (1 + rNOM/4)4 – 1

= (1 + 0.10/4)4 – 1

= 0.103813

= 10.3813%.

Answer 2

The preferred stock pays $8 annually in dividends. Therefore, its nominal rate of return would be:

Nominal rate of return = $8/$80 = 10%.

alternatively, you could determine the security’s periodic return and multiply by 4.

Periodic rate of return = $2/$80 = 2.5%.

Nominal rate of return = 2.5% ´ 4 = 10%.

b.   EAR          = (1 + rNOM/4)4 – 1

        = (1 + 0.10/4)4 – 1

        = 0.103813 = 10.3813%.