. 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 norminal annual rate ofreturn? b. What is its effective annual rate of return?
a. The preferred stock pays $8 annually in dividends. Therefore, its nominal rate of return would be:
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%.
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b. EAR = (1 + rNOM/4)4 – 1
= (1 + 0.10/4)4 – 1
= 0.103813 = 10.3813%.
a. Nominal annual rate of return = Annual Dividend/* current
Price
= $2 * 4 / $80 = 10%
b. Effective annual rate of return = (1 + rNOM/4)4 – 1
= (1+ 0.10/4)^4 - 1 = 10.38%
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