Question

Bedekar, Inc., has an issue of preferred stock outstanding that pays a $3.40 dividend every year in perpetuity. If this issue currently sells for $91 per share, what is the required return?

Answer 1

i=4.84%

Step-by-step explanation:

the key to answer this question, is to remember the model of return for a perpeuity dividend calculation:

`Value=(1)/(i-k)`

where value is the current stock price, i is the dividend yield and k is the growth rate, so applying to this particular case we have

k=3.4/91

k=3.74%

and solving i for the previous formula:

`91=(1)/(i-0.0374)`

`0.01098={i-0.0374}`

`i=4.84\%`