Question

A share of preferred stock pays a quarterly dividend of $2.3. If the price of this preferred stock is currently $126, what is the nominal annual rate of return? Group of answer choices

a) 7.30%
b) 7.00%
c) 6.70%
d) 6.40%
e) 6.10%

Answer 1

The nominal annual rate of return for the preferred stock is found by dividing the total annual dividend by the stock price and then multiplying by 100, resulting in a rate of 7.30%.

Step-by-step explanation:

To calculate the nominal annual rate of return for preferred stock paying quarterly dividends, we need to first find the total annual dividend payment. This preferred stock pays $2.3 per quarter, which means the total dividend per year is $2.3 × 4 = $9.2. To find the rate of return, we divide the annual dividend by the price of the stock and then multiply by 100 to get a percentage.

The formula looks like this: (Annual Dividend / Price) × 100 = Nominal Annual Rate of Return.

Using the given numbers: ($9.2 / $126) × 100 = 7.30%. The nominal annual rate of return for this preferred stock is therefore 7.30%.

The correct answer to the question is a) 7.30%.