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Suppose you purchased a $50 par value preferred stock
Suppose you purchased a $50 par value preferred stock. The stock's price is $48 per share and it pays a 10.2% 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? 07.01% O 11.3% O 10.2% O 8.9% O 10.63%
Expert Solution
FACE VALUE OF THE PREFERRED STOCK = $50
STOCK PRICE = $48
DIVIDEND RATE = 10.2%
DIVIDEND OF THE PREFERRED STOCK = 10.2% * 50 = $5.1
PRICE OF THE PREFERRED STOCK = DIVIDEND / EXPECTED RETURN OF THE PREFERRED STOCK
=> 48 = 5.1/EXPECTED RETURN
=> EXPECTED RETURN = 5.1/48 * 100 = 10.625%
= 10.63%
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