You are considering purchasing a share of preferred stock that pays an annual dividend of $4.50. If you require an 11% rate of return on your investment, what is the maximum price you will pay for the stock?

The maximum that will be paid for the stock is $40.91.

Explanation:

This can be calculated using the dividend yield formula as follows:

Dividend yield = Dividend per share : Price per share ... (1)

Where;

Dividend yield = required rate of return = 11%, or 0.11

Dividend per share = $4.50

Price per share = ?

Substituting the values into equation (1), we have:

0.11 = $4.50 : Price per share

Making price per share the subject of the formula, we have:

Price per share = $4.50 : 0.11 = $40.91

Therefore, the maximum that will be paid for the stock is $40.91.