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Item2
Explanation
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P=DIV1 / r
0$5.90 /
=0.10
=$59.00
Preferred Products has issued preferred stock with an annual dividend of
$5.90 that will be paid in perpetuity.
a. If the discount rate is 10%, at what price should the preferred
sell? (Round your answer to 2 decimal places.)
b. At what price should the stock sell 1 year from now? (Round your
answer to 2 decimal places.)
c. What are the (i) the dividend yield; (ii) the capital gains yield; (iii) the
expected rate of return of the stock? (Enter your answers as a whole
percent.)
Show correct answersExplanation
Item 2 1.16 of 1.16 points awarded Item Scored
The price is always one year prior to the dividend payment. This is a key point to
remember when dealing with stock problems.
Some values below may show as rounded for display purposes, though unrounded
numbers should be used for actual calculations.
Preferred stock is a perpetuity because it pays a constant annual dividend. Thus, DIV0 =
DIV1 = DIV2, etc.
a.
c.
(i)
b.
(ii)
(iii)
Dividend
yield
P=DIV2 / r
1
=$5.90 /
0.10
=$59.00
Capital gains
yield
Expected rate of
return
=(P1 − P0) / P0
=($59 − $59) /
$59
=0.00, or 0%
Annual dividend / Stock
=
price
=DIV1 / P0
=$5.90 / $59.00
=0.10, or 10%
Dividend yield + Capital
=
gains yield
=10% + 0%
=10%
