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

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

Solutions

Chapter
Section Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
ISBN: 9781337395250
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 10% of par, and a current market price of (a)$61, (b) $90, (c)$100, and (d) $138? (a) Summary Introduction To compute: The nominal rate of return on a perpetual preferred stock with current market price of$61.

Introduction:

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 information:

Dp is $10 (10% on par value of$100)

Vp is $61. 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$90.

(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$138.

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