Question

Bruner Aeronautics has perpetual preferred stock outstanding with a par value of $100. The stock pays a quarterly dividend of $3, and its current price is $104.

What is its nominal annual rate of return? Round your answer to two decimal places.
%

What is its effective annual rate of return? Round your answer to two decimal places.

Answer 1

Solution:
	Nominal annual rate of return	11.54%
	Effective annual rate of return	12.05%
Working Notes:
	Nominal annual rate of return = Dividend in a year /current price
	Nominal annual rate of return = (quarterly dividend x no of quarter in a year) /current price
	Nominal annual rate of return = ($3 x 4) /$104
	Nominal annual rate of return = $12/$104 = 0.11538461538 = 11.538461538% = 11.54%
	Effective annual rate of return = ( 1 + Nominal return/4)^4   - 1
		=(1+ (0.11538461538/4))^4 - 1
		=1.120473923 - 1
		=0.120473923
		=12.047 %
		=12.05%
Please feel free to ask if anything about above solution in comment section of the question.