Question

# ​(Preferred stockholder expected return​) You own 150 shares of Budd Corporation preferred stock at a market...

​(Preferred stockholder expected return​) You own 150 shares of Budd Corporation preferred stock at a market price of \$23 per share. Budd pays dividends of ​\$ 1.50. What is your expected rate of​ return? If you have a required rate of return of 5 ​percent, should you sell your shares or buy more of the​ stock? a. Your expected rate of return is ​%. ​(Round to two decimal​ places.)

Market Price of Preferred Stock = \$23 per share

Annual Dividend of Preferred Stock = \$1.50

Calculating the expected Return of Preferred Stock:-

Expected Return = Annual Dividend/Market Price

Expected Return = \$1.50/\$23

Expected Return of Preferred Stock = 6.52%

- As Preferred Stock provides an expected return of 6.52% while your required rate of return is 5 % which is less than the provided by Preferred Stock. Thus, it means the Preferred Stock undervlaued.

Thus, you should Buy more of the Stocks.

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