(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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