Question

Fegley, Incorporated, has an issue of preferred stock outstanding that pays a 4.95 dividend every year in perpetuity. If this issue currently sells for94 per share, what is the required return?

Answer 1

The required return for Fegley, Incorporated's preferred stock is approximately 5.27%. For Babble, Inc., after calculating the present value of expected dividends at a 15% rate of return, the price per share is roughly $256,500.

Step-by-step explanation:

To calculate the required return for Fegley, Incorporated's preferred stock that pays a $4.95 dividend annually in perpetuity, we use the formula for the price of a perpetuity: Price = Dividend / Required Return. Solving for the required return gives us: Required Return = Dividend / Price. Plugging in the given values, we have Required Return = $4.95 / $94. Performing the division, we find that the Required Return is approximately 0.0527 or 5.27%.

Let's move on to the case of Babble, Inc. Determining the price per share involves calculating the present value (PV) of expected dividends since all profits are paid out as they occur. Given a 15% expected rate of return, we calculate the PV for each dividend payout and sum them up before dividing by the number of shares, which is 200. After calculating the present value of all expected dividends, the final step is to determine the price per share, which is approximately $256,500 per share.