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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 RETURNS Avondale Aeronautics has perpetual preferred stock outstanding with a par value of $100. The stock pays a quarterly dividend of $1.00 and its current price is $45.

  1. a. What is its nominal annual rate of return?
  2. b. What is its effective annual rate of return?

a.

Summary Introduction

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

Introduction:

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 information:

Dp is $4 in a year ($1 for each quarter).

Vp is $45.

Formula to compute nominal annual rate of return,

rp=DpVp

Where,

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

b.

Summary Introduction

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

Introduction:

Effective rate of Return:

Effective rate is the resulted rate after the nominal rate and it 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.

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