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Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
ISBN: 9781285867977

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BuyFindarrow_forward

Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
ISBN: 9781285867977
Textbook Problem

PREFERRED STOCK RATE OF RETURN What will be the nominal rate of return on a perpetual preferred stock with a $100 par value, a stated dividend of 8% of par, and a current market price of (a) $60, (b) $80, (c) $100, and (d) $140?

(a)

Summary Introduction

To compute: The nominal rate of return on a perpetual preferred stock with current market price of $60.

Nominal rate of Return:

Nominal rate is the rate that is mentioned with the concerned security or financial instrument. It determines the basic cost of finance without any compounding effect.

Perpetual Preferred Stock:

Perpetual preferred stock is a financial instrument for long term financial assistance required by the companies. A category of preferred stock that doesn’t have a maturity date and is available without any fixed tenure is called perpetual preferred stock.

Explanation

Given,

Dp is $8 (8% on par value of $100)

Vp is $60.

Formula to compute rate of return,

rp=DpVp

Where,

  • Dp is annual dividend on preferred stock.
  • Vp is current market price of preferred stock

(b)

Summary Introduction

To compute: The nominal rate of return on a perpetual preferred stock with current market price of $80.

(c)

Summary Introduction

To compute: The nominal rate of return on a perpetual preferred stock with current market price of $100.

(d)

Summary Introduction

To compute: The nominal rate of return on a perpetual preferred stock with current market price of $140.

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