Question

(a) Salam Investment has outstanding borrowings that include preferred stock. One of these borrowings is (nonconvertible) preferred stock (cumulative) with a par value of $250 and an annual dividend rate of 8.25%. This preferred stock is currently selling for $260 per share. Calculate the required rate of return on this nonconvertible preferred stock

(b) Jusco Malaysia is selling for $30 a share. In looking at the stream of dividends over the past ten years, you find out that the first dividend was $1.00 and the last dividend was $2.00. Calculate the required rate of return from investing in this share

Answer 1

a) Here dividend rate is 8.25% which is on par value. So it would come as followings:

8.25% OF $250= 20.625

>> So for required rate of return= (Preferred Dividend per share/ Current market price per share)*100

=(20.625/260)*100

= 0.079*100

= 7.9 %

b) Here the dividend growth rate (CAGR)= (2/1)^(1/10)

=0.071*100

= 7.1%

Now for required rate of return on share, here CAGR is 7.1 so next expected dividend would be $2.142 based ondividend growth rate

So, Required rate on return = (Expected dividend/Share price)+ Dividend growth rate

= (2.142/30)+7.1

=0.0714+7.1

= 7.1714