Question

What will be the nominal rate of return on a perpetual preferred stock with a $100 par value, a stated dividend of 12% of par, and a current market price of (a) $51.00, (b) $90.00, (c) $115.00, and (d) $133.00? Round your answers to two decimal places.

Answer 1

a.Cost of preferred stock is calculated using the below formula:

Cost of preferred stock= Preferred dividend/ Price of preferred stock

= $12 / $51

= 0.2353*100

= 23.53%.

b.Cost of preferred stock is calculated using the below formula:

Cost of preferred stock= Preferred dividend/ Price of preferred stock

= $12 / $90

= 0.1333*100

= 13.33%.

c.Cost of preferred stock is calculated using the below formula:

Cost of preferred stock= Preferred dividend/ Price of preferred stock

= $12 / $115

= 0.1043*100

= 10.43%.

d.Cost of preferred stock is calculated using the below formula:

Cost of preferred stock= Preferred dividend/ Price of preferred stock

= $12 / $133

= 0.0902*100

= 9.02%.