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

Answer: a) 16.39%

b) 11.11%

c) 10%

d) 7.25%

Explanation:

In calculating the nominal rate of return on a perpetual stock, the following formula is used,

rp = Dp/Vp.

Where,

r = rate of return,

D = dividend;

V = current market price of preferred stock

Dividend is 10% of Par

Dividend = 10% * 100

Dividend = $10

a) $61

= 10/61

= 0.16393442623

= 16.39%

b) $90

= 10/90

= 11.11%

c) $100

= 10/100

= 10%

d) $138

= 10/138

= 0.07246376811

= 7.25%

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