Question

What will be the nominal rate of return on a perpetual preferred stock with a $100 par value, a stated dividend of 8% of par, and a current market price of (a) $60, (b) $80, (c) $100, and (d) $140?

Answer 1

a. 13.33%

b. 10%

c. 8%

d. 5.71%

Step-by-step explanation:

The computation of nominal rate of return is given below:-

Rate of return = Dividend ÷ Current market price

For the first case

= $8 ÷ $60

= 13.33%

For the second case

= $8 ÷ $80

= 10%

For the third case

= $8 ÷ $100

= 8%

For the fourth case

= $8 ÷ $140

= 5.71%

Note :- To get $8 you need to multiply by $100 by the 8%