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?

Question

Business

Yasmine Sutton

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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Answers (1)

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Sanai Michael · Answer 1

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%.