Answered

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Potter's Violin Co. has just issued nonconvertible preferred stock with a par value of $100 and an annual dividend rate of 15.25 percent. The preferred stock is currently selling for $138.50 per share. Which rate of return does the investor expect to receive on this stock if the stock is purchased today? Round the answer to two decimal places is purchased today? Round the answer to two decimal places in percentage form.

Sagot :

The investor can expect to receive a return of 11.01% on this stock if the stock is purchased today

Preferred stock is a class of ownership that has priority claims to retained earnings, relative to common equity owners. Suppose the preferred stock pays a constant dividend D, and the required rate of return that is r, then the price of the preferred stock is D/r.

Dividend payment = par value * dividend rate

= 100*15.25% = $15.25.

The price of the stock = 15.25 / rate of return = 138.5, which implies that the rate of return = 11.01%.

Hence, the rate of return of the stock is 11.01%

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