Question

Rebello's preferred stock pays a dividend of $1.00 per quarter,and it sells for $55.00 per share.What is its effective annual (not nominal)rate of return?

A) 6.62%
B) 6.82%
C) 7.03%
D) 7.25%
E) 7.47%

Answer 1

7.47%

Step-by-step explanation:

Calculation for the effective annual rate of return

Using this formula

Effective annual rate of return=[1+(Preferred quarterly dividend+Preferred stock price]^Periods per year-1

Let plug in the formula

Where,

Periods per year =4

Preferred quarterly dividend=$1.00

Preferred stock price=$55.00

Effective annual rate of return = [1+ ($1.00/$55.00)]^4 - 1

Effective annual rate of return=(1+0.018181818)^4-1

Effective annual rate of return=(1.018181818)^4-1

Effective annual rate of return =1.0747-1

Effective annual rate of return =0.0747*100

Effective annual rate of return = 7.47%

Therefore Effective annual rate of return will be 7.47%