Question

Smiling Elephant, Inc., has an issue of preferred stock outstanding that pays a $5.00 dividend every year, in perpetuity.

If this issue currently sells for $80.10 per share, what is the required return? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Required return             %

Answer 1

Required Rate of Return of a Preferred Stock

The Required Rate of Return of a Preferred Stock is calculated by using the following formula

Required Rate of Return of a Preferred Stock = [Annual Preferred Dividend / Market Price of the Stock] x 100

Annual Dividend = $5.00 per share

Market Price per share = $80.10 per share

Therefore, the Required Rate of Return of a Preferred Stock = [Annual Preferred Dividend / Market Price of the Stock] x 100

= [$5.00 / $80.10] x 100

= 6.24%

“Hence, the Required Rate of Return of a Preferred Stock would be 6.24%”