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4 November, 05:46

Preferred Products has issued preferred stock with an annual dividend of $8 that will be paid in perpetuity. a. If the discount rate is 12%, at what price should the preferred sell? b. At what price should the stock sell 1 year from now? c. What is the dividend yield, the capital gains yield, and the expected rate of return of the stock?

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  1. 4 November, 06:01
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    The computation is shown below:

    a. The price of preferred stock is

    = Dividend : Discount rate

    = $8 : 12%

    = $66.67

    b. Without changing the discount rate we are unable to calculate the stock price so stock price is do not change

    c. Now the

    Dividend yield is

    = Annual dividend : Price

    = $8 : $66.67

    = 12%

    There is no capital gain yield given in the question that means capital gains

    And, the expected rate of return is

    = Dividend yield + capital yield

    = 12% + 0

    = 12%
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