Question

Fegley. Incorporated, has an issue of preferred stock outstanding that pays a $6.30 dividend every year, in perpetuity. If this istue currently sells for $8075 per share, what is the required return? Note: Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.9., 32.16.

Answer 1

The required return on Fegley, Incorporated's preferred stock that pays a $6.30 annual dividend and sells for $807.50 per share is 0.78%.

Step-by-step explanation:

The student is asking about how to calculate the required return on preferred stock which pays a perpetual dividend. To find the required rate of return, we use the formula for the cost of preferred stock, which is the dividend divided by the current price, also known as the Dividend-Price Ratio.

The formula is:

Required Return = Dividend / Price

In the given case, Fegley, Incorporated pays an annual dividend of $6.30 and the preferred stock is currently selling for $807.50 per share. Plugging these values into the formula gives:

Required Return = $6.30 / $807.50 = 0.0078

To express this as a percentage, we multiply by 100:

Required Return = 0.0078 * 100 = 0.78%

Therefore, the required return on Fegley, Incorporated's preferred stock is 0.78% when rounded to two decimal places.