Question

A share of preferred stock pays a quarterly dividend of $2.5. If the price of this preferred stock is currently $101, what is the nominal annual rate of return?

A.9.90%
B.8.90%
C.8.40%
D.9.40%
E.7.90%

Answer 1

The nominal annual rate of return for the preferred stock is 9.9%, obtained by multiplying the quarterly dividend by four and dividing by the stock price.

Step-by-step explanation:

To calculate the nominal annual rate of return for a share of preferred stock that pays a quarterly dividend of $2.5, we need to first determine the total annual dividend payment. Since dividends are paid quarterly, we multiply the quarterly dividend by four: $2.5 × 4 = $10 per year.

Next, we take the annual dividend and divide it by the price of the stock to find the rate of return: $10 ÷ $101 = 0.099 or 9.9%. Therefore, the nominal annual rate of return is 9.9%, which corresponds to option A.9.90%.