Question

Preferred Products has issued preferred stock with an annual dividend of $5.60 that will be paid in perpetuity.a. If the discount rate is 10.00%, at what price should the preferred sell? (Round your answer to 2 decimal places.) b. At what price should the stock sell 1 year from now? (Round your answer to 2 decimal places.) c. What is the dividend yield, the capital gains yield, and the expected rate of return of the stock? (Enter your answers as a whole percent.) c. What is the dividend yield, the capital gains yield, and the expected rate of return of the stock? (Enter your answers as a whole percent.) c. What is the dividend yield, the capital gains yield, and the expected rate of return of the stock? (Enter your answers as a whole percent.)

Answer 1

A. This preferred stock will be paying dividends perpetually of $5.6.

Value of perpetuity (@10% discount rate) = Annual Dividend/Discount rate

=> Value of preferred share = $5.6/10% =$56

B. After one year, assuming there is no change in discount rate (10%).

Value of perpetual share in year 2 = $5.6/10% = $56

C. Dividend yield = Annual dividend/Share price

Dividend yield = $5.6/56 = 10%

Capital Gains yield = (Final price - Initial Price)/Initial Price

=> Capital gains yield = 0%

Expected Rate of Return or Total Return on Stock = Dividend yield + Capital gains yield = 10%