Preferred Products has issued preferred stock with an annual dividend of $5.60 t
ID: 1172502 • Letter: P
Question
Preferred Products has issued preferred stock with an annual dividend of $5.60 that will be paid in perpetuity.a. If the discount rate is 10.00%, at what price should the preferred sell? (Round your answer to 2 decimal places.) b. At what price should the stock sell 1 year from now? (Round your answer to 2 decimal places.) c. What is the dividend yield, the capital gains yield, and the expected rate of return of the stock? (Enter your answers as a whole percent.) c. What is the dividend yield, the capital gains yield, and the expected rate of return of the stock? (Enter your answers as a whole percent.) c. What is the dividend yield, the capital gains yield, and the expected rate of return of the stock? (Enter your answers as a whole percent.)
Explanation / Answer
A. This preferred stock will be paying dividends perpetually of $5.6.
Value of perpetuity (@10% discount rate) = Annual Dividend/Discount rate
=> Value of preferred share = $5.6/10% =$56
B. After one year, assuming there is no change in discount rate (10%).
Value of perpetual share in year 2 = $5.6/10% = $56
C. Dividend yield = Annual dividend/Share price
Dividend yield = $5.6/56 = 10%
Capital Gains yield = (Final price - Initial Price)/Initial Price
=> Capital gains yield = 0%
Expected Rate of Return or Total Return on Stock = Dividend yield + Capital gains yield = 10%