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%”**

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