Villalpando Winery wants to raise $35 million from the sale of preferred stock. If the winery wants to sell one million shares of preferred stock, what annual dividend will it have to promise if investors demand a return of a. 12 %? b. 16 %? c. 8 %? d. 7 %? e. 6 %? f. 3 %? a. What annual dividend will it have to promise if investors demand a return of 12 %?

(a) $4.2

(b) $5.6

(c) $2.8

(d) $2.45

(e) $2.1

(f) $1.05

Explanation:

Given that,

Total amount of capital raised from the sale of preferred stock = $35 million

Number of shares = 1 million

Price per share = Total capital raised : Number of shares

= $35 million : 1 million

= $35 per share

(a) If a Expected rate of return = 12 percent

Annual dividend = Price per share * Expected Rate of return

= $35 per share * 0.12

= $4.2

(b) If a Expected rate of return = 16 percent

Annual dividend = Price per share * Expected Rate of return

= $35 per share * 0.16

= $5.6

(c) If a Expected rate of return = 8 percent

Annual dividend = Price per share * Expected Rate of return

= $35 per share * 0.08

= $2.8

(d) If a Expected rate of return = 7 percent

Annual dividend = Price per share * Expected Rate of return

= $35 per share * 0.07

= $2.45

(e) If a Expected rate of return = 6 percent

Annual dividend = Price per share * Expected Rate of return

= $35 per share * 0.06

= $2.1

(f) If a Expected rate of return = 3 percent

Annual dividend = Price per share * Expected Rate of return

= $35 per share * 0.03

= $1.05