Question

The current price of a preferred stock is $100. The preferred stock just paid a dividend of $1,2. The preferred stock pays dividends every quarter and the growth rate of dividends is 3% per quarter.

a) What is the quarterly discount rate to price this preferred stock?

b) What is the annual percentage rate to price this preferred stock?

c) What is the real annual percentage discount rate if the expected rate of inflation is 2,3%?

d) What is the effective annual rate?

e) What is the real effective annual rate?

Answer 1

	Quarterly discount rate, r	1.2*(1+3%)/100 + 3%
a)	Quarterly discount rate, r	4.2360%
b)	Annual percentage rate	16.944%
c)	Real rate	(1+16.944%)/(1+2.3%) -1
	Real rate	14.31%
d)	Effective annual rate	1.2*(1+3%)^4/100 + ((1+3%)^4-1)
	Effective annual rate	13.90%
e)	Real effective rate	(1+13.90%)/(1+2.3%) -1
	Real rate	11.34%