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Preferred Products has issued preferred stock with an annual dividend of $7
Preferred Products has issued preferred stock with an annual dividend of $7.32 that will be paid in perpetuity.
a. If the discount rate is 12%, at what price should the preferred sell? (Round your answer to 2 decimal places.)
Current price
r I
b. At what price should the stock sell 1 year from now? (Round your answer to 2 decimal places.)
Future price
c. What are the (i) the dividend yield; (ii) the capital gains yield; (iii) the expected rate of return of the stock? (Enter your answers as a whole percent.)
(i) Dividend yield ? (ii) Capital gains yield ? (iii) Expected rate of return ?
Expert Solution
a) Computation of Current Price of Preferred Stock:
Current Price = Annual Dividend/Discount Rate
= $7.32/12%
= $61
b) Computation of Future Price:
Without changes on the discount rate, the stock price will not change.
So, Future Price is same as Current Price i.e. $61
c)
(i) Computation of Dividend Yield:
Dividend Yield = Annual Dividend/Current Price
= $7.32/$61
= 12%
(ii) Computation of Capital Gains Yield:
Capital gains yield is the percentage of the original price that is accounted for by the price changing. The capital gains yield here is zero because there will be no capital gains income from the preferred stock.
So, Capital Gains Yield = 0
(iii) Computation of Expected Rate of Return of the Stock:
Expected Rate of Return of the Stock = Dividend Yield + Capital Gains Yield
= 12% + 0
= 12%
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