Question

(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.)

Answer #1

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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