Suppose you purchased a $50 par value preferred stock

Finance Dec 22, 2020

Suppose you purchased a $50 par value preferred stock. The stock's price is $48 per share and it pays a 10.4% dividend rate per year. Investors require a 13% rate of return on the stock and the marginal tax rate is 34%. What is the expected return on this preferred stock?

Expert Solution

expected return on the preferred stock = dividend/current price

expected return on the preferred stock = 10.4% of 50/48

expected return on the preferred stock = 10.83%

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