Question

Farley Inc. has perpetual preferred stock outstanding that sells for $38 a share and pays a dividend of $3.00 at the end of each year. What is the required rate of return? Round your answer to two decimal places.

Answer 1

Information provided:

Price of preferred stock= $38

Preferred stock dividend= $3

Required rate of return is calculated using the below formula:

Required return= Preferred stock dividend/ Stock price

                               = $3/ $38

                               = 0.0789*100

                               = 7.89%.

Therefore, the required rate of return is 7.89%