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ABC has preferred shares outstanding. The current price of each preferred share is $120 and it...

ABC has preferred shares outstanding. The current price of each preferred share is $120 and it pays a dividend of $6 each year. What is the required rate of return on this stock, if the next dividend is going to be paid tomorrow? What if the most recent dividend was paid yesterday?

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Answer #1

If the next dividend is going to be paid tomorrow

Price = Dividend + Dividend/r

Price - Dividend = Dividend/r

r = Dividend/(Price - Dividend)

r = 6/(120 - 6)

r = 6/114

r = 0.05263157895

r = 5.263157895%

The required rate of return on the stock is 5.263157895% with next dividend being paid tomorrow

If the most recent dividend was paid yesterday, then the required rate of return is

r = Dividend/Price

r = 6/120

r = 5%

The required rate of return is 5% if the most recent dividend was paid yesterday

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