Question

(a) Salam Investment has outstanding borrowings that include preferred stock. One of these borrowings is (nonconvertible)...

(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

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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

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