Question

Moraine, Inc., has an issue of preferred stock outstanding that pays a 3.50 dividend in perpetuity. If this issue currently sells for 85 per share, what is the required return

Answer 1

Answer:

4.12%

Explanation:

Given that:

Payment of dividend per year = $3.50

Issue price of preferred stock = $85

(Note: Assumed that $85 is the face value of the preferred stock)

Hence, the formula for Required return = Dividend per year/ face value of the stock

= $3.5/ $85 = 0.0411764705

Then converting the answer to percentage, we have

0.0411764705 * 100% = 4.1764705

Therefore, the required return is = 4.12% (approximately)