Preferred Products has issued preferred stock with an annual dividend of $8 that will be paid in perpetuity. a. If the discount rate is 12%, at what price should the preferred sell? b. At what price should the stock sell 1 year from now? c. What is the dividend yield, the capital gains yield, and the expected rate of return of the stock?

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Business

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3 December, 10:51

Preferred Products has issued preferred stock with an annual dividend of $8 that will be paid in perpetuity. a. If the discount rate is 12%, at what price should the preferred sell? b. At what price should the stock sell 1 year from now? c. What is the dividend yield, the capital gains yield, and the expected rate of return of the stock?

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Lucas Fox · Answer 1

The computation is shown below:

a. The price of preferred stock is

= Dividend : Discount rate

= $8 : 12%

= $66.67

b. Without changing the discount rate we are unable to calculate the stock price so stock price is do not change

c. Now the

Dividend yield is

= Annual dividend : Price

= $8 : $66.67

= 12%

There is no capital gain yield given in the question that means capital gains

And, the expected rate of return is

= Dividend yield + capital yield

= 12% + 0

= 12%