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Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
ISBN: 9781337395250

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BuyFindarrow_forward

Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
ISBN: 9781337395250
Textbook Problem

PREFERRED STOCK VALUATION Farley Inc. has perpetual preferred stock outstanding that sells for $30 a share and pays a dividend of $2.75 at the end of each year. What is the required rate of return?

Summary Introduction

To determine: The required rate of return on preferred stock.

Introduction:

Return on Preferred Stock The return earned by the firm’s preferred stock holders from the investment in preferred stock is the return on preferred stock. The preference stockholders get dividend as return from investment prior to the common stockholders. It is computed by dividing the dividend received on preferred stock by the current intrinsic value.

Explanation

Given information:

Dividend per share is $2.75.

Current intrinsic value is $30.

The formula to calculate the value of preferred stock is,

VP=DPrP

Where,

  • DP is the dividend on preference share.
  • VP is the current intrinsic value of preferred stock.
  • rp is the required rate of return on preferred stock

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