Question

You are considering purchasing a share of preferred stock that pays an annual dividend of $4.50. If you require an 11% rate of return on your investment, what is the maximum price you will pay for the stock?

Answer 1

The maximum that will be paid for the stock is $40.91.

Step-by-step explanation:

This can be calculated using the dividend yield formula as follows:

Dividend yield= Dividend per share ÷ Price per share ............... (1)

Where;

Dividend yield = required rate of return = 11%, or 0.11

Dividend per share = $4.50

Price per share = ?

Substituting the values into equation (1), we have:

0.11 = $4.50 ÷ Price per share

Making price per share the subject of the formula, we have:

Price per share = $4.50 ÷ 0.11 = $40.91

Therefore, the maximum that will be paid for the stock is $40.91.

Answer 2

$40.91

Step-by-step explanation:

The formula for dividend yield;

Dividend yield= Dividend per share/Share price

By putting values given in question in above formula, we get;

11%=$4.5/Share price

Share price=$4.5/.11

Share price=$40.91