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31 August, 23:24

What will be the nominal rate of return on a perpetual preferred stock with a $100 par value, a stated dividend of 10% of par, and a current market price of (a) $61, (b) $90, (c) $100, and (d) $138

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  1. 31 August, 23:36
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    Answer: a) 16.39%

    b) 11.11%

    c) 10%

    d) 7.25%

    Explanation:

    In calculating the nominal rate of return on a perpetual stock, the following formula is used,

    rp = Dp/Vp.

    Where,

    r = rate of return,

    D = dividend;

    V = current market price of preferred stock

    Dividend is 10% of Par

    Dividend = 10% * 100

    Dividend = $10

    a) $61

    = 10/61

    = 0.16393442623

    = 16.39%

    b) $90

    = 10/90

    = 11.11%

    c) $100

    = 10/100

    = 10%

    d) $138

    = 10/138

    = 0.07246376811

    = 7.25%

    If you need any clarification do comment. Cheers.
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