Question

What will be the nominal rate of return on a perpetual preferred stock with a $100 par value, a stated dividend of 9% of par, and a current market price of (a) $68, (b) $81, (c) $117, and (d) $134? Round your answers to two decimal places. a. b. C. d.

Answer 1

a. D = 9% x $100 = $9

Par value = $100

Po = $68

Kp = D/Po

Kp = $9/$68

Kp = 0.1324 = 13.24%

b. Kp = $9/$81

Kp = 0.1111 = 11.11%

c. Kp = $9/$117

Kp = 0.0769 = 7.69%

d. Kp = $9/$134

Kp = 0.0672 = 6.72%

Explanation: In this question, we need to determine the fixed dividend paid by multiplying the dividend rate (9%) by the par value($100). Then, we will divide the fixed dividend by the current market price.