Perferrd Products has issued perferred stock with an annual dividend of $6.60 th

Question

Perferrd Products has issued perferred stock with an annual dividend of $6.60 that will be paid in perpetuity.

a. if the discount rate is 11%, at what price should the preferred sell?

current price_____________

b. at wha price should the stock sell 1 year from now?

future price___________

c. what is the dividend yield, the capital gains yield, and the expected rate of return of th estock? (Leave no cells blank-be certain to enter "0" wherever required. Enter your answers as a whole percent.)

dividend yield ________

captial gains yields_______

expected rate of return___________

Explanation / Answer

Solution:

Perferred stock with an annual dividend of $6.60

The preferred stock pays a level perpetuity of dividends.

The expected dividend next year is the same as this year’sdividend ($6.60).

a. if the discount rate is 11%

what price should the preferred sell?

a. $6.60/0.11= $60

b. Stock price will not change if there is no change in the discount rate

c.Dividend yield = $6.60/$60

= 0.11

=11%

Capital gains yield = 0

Expected rate of return = 1

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