Question

Moraine, Inc., has an issue of preferred stock outstanding that pays a $4.75 dividend every year in perpetuity. If this issue currently sells for $98 per share, what is the required return? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Required return %

Answer 1

Payment of dividend per year = $4.75

Issue price of preferred stock = $98

(Note: Assumed that $98 is the face value of the preferred stock)

Required return = Dividend per year/ face value of the stock

= $4.75/ $98 = 0.048469

= 4.85% (approx.)

NOTE: If the face value of the preferred stock is $100 and it is issuing at discount price of $98 the the required return will be 4.75% ($4.75/ $100).