Question

Farley Inc. has perpetual preferred stock outstanding that sells for $40.00 a share and pays a dividend of $5.00 at the end of each year. What is the required rate of return? Round your answer to two decimal places.

%

Answer 1

Required rate = 12.5%

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Price of preferred stock = annual dividend/ required rate of return

40 = 5/ required rate

Required rate = 5/40

                             = 0.125 or 12.5%

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