   Chapter 9, Problem 9P 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 RETURNS Bruner Aeronautics has perpetual preferred stock outstanding with a par value of $100. The stock pays a quarterly dividend of$2, and its current price is $80. a. What is its nominal annual rate of return? b. What is its effective annual rate of return? a. Summary Introduction To compute: The nominal rate of return on a perpetual preferred stock. 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. 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. Explanation Given, Dp is$8 in a year ($2 for each quarter). Vp is$80.

Formula to compute nominal annual rate of return,

rp=DpVp

Where,

• Dp is annual dividend on preferred stock

b.

Summary Introduction

To compute: The effective rate of return on a perpetual preferred stock.

Effective rate of Return:

Effective rate is the resulted rate after the nominal rate is compounded based on the frequency of payment during a year. It is more than the nominal annual rate of return as it considers the nominal return on each of the payment of a year.

Still sussing out bartleby?

Check out a sample textbook solution.

See a sample solution

The Solution to Your Study Problems

Bartleby provides explanations to thousands of textbook problems written by our experts, many with advanced degrees!

Get Started 