LTM, Inc. has an issue of preferred stock whose par value is $1,000. The preferred stock pays a 4.5% dividend. If investors require a 5.5% rate of return for these shares, what price should the preferred stock sell for?

Question

Business

Colin Bray

28 January, 08:04

LTM, Inc. has an issue of preferred stock whose par value is $1,000. The preferred stock pays a 4.5% dividend. If investors require a 5.5% rate of return for these shares, what price should the preferred stock sell for?

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Claire · Answer 1

return on preferred stock (rp) = Dividend / Current price

rate of return = 5.5% or 0.055 as a decimal

Dividend amount = dividend rate * par value;

Dividend amount = 4.5% * 1000 = $45

Current price = ?

Next, plug the numbers to the formula above to find Price;

0.055 = 45 / Price

0.055Price = 45

Divide both sides by 0.055;

Price = 45 / 0.055

Price = $818.18