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8 March, 04:11

Your firm has preferred stock outstanding that pays a current dividend of $3.00 per year and has a current price of $35.90. You anticipate that the economy will grow steadily at a rate of 2.00% per year for the foreseeable future. What is the market required rate of return on your firm's preferred stock?

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  1. 8 March, 07:15
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    Answer: 8.36%

    Explanation:

    The growth rate being thrown in there was in an effort to confuse you into using the Dividend Discount Model.

    This is a Preferred Stock however and is calculated differently as such,

    Net Price = Dividends / rate

    Making rate the subject we have,

    r = Dividends / Net Price

    So plugging in the figures we have,

    r = 3 / 35.9

    r = 0.08356545961

    r = 8.36%

    The market required rate of return on your firm's preferred stock is 8.36%.
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Home » Business » Your firm has preferred stock outstanding that pays a current dividend of $3.00 per year and has a current price of $35.90. You anticipate that the economy will grow steadily at a rate of 2.00% per year for the foreseeable future.
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