   Chapter 9, Problem 7P Fundamentals of Financial Manageme...

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

Solutions

Chapter
Section 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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