Question

Moraine, Inc., has an issue of preferred stock outstanding that pays a $3.15 dividend every year in perpetuity. If this issue currently sells for $92 per share, what is the required return?

A) 3.42%
B) 4.15%
C) 3.42%
D) 4.15%

Answer 1

The required return for Moraine, Inc.'s preferred stock is calculated by dividing the annual dividend by the price per share. Given an annual dividend of $3.15 and a share price of $92, the required return is 3.42%.

Step-by-step explanation:

To calculate the required return for Moraine, Inc.'s preferred stock, we can use the formula for the cost of preferred stock:

r = D / P0

Where r is the required return, D is the annual dividend, and P0 is the price per share.

For Moraine, Inc., D = $3.15 and P0 = $92:

r = $3.15 / $92

r = 0.03423 or 3.423%

The closest answer from the options given is therefore 3.42%, which would be option C, confirming the required return an investor would demand for holding this preferred stock.