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DEF Inc. offers preferred stock that pays 5% of its par value, which is $100. The stock is...

Question:

DEF Inc. offers preferred stock that pays 5% of its par value, which is $100. The stock is currently selling for $65. What is the market's required rate of return on this preferred stock?

Answer and Explanation:

The formula for preferred stock price is:

Price = Cash flow / rate of return

  • Price = $65
  • Cash flow = 5% * $100 = $5

Substituting the values:

  • $65 = $5 / Return
  • Return = $5 / $65 = 0.0769 or 7.69%

The market's required return is 7.69%.


Learn more about this topic:

Preferred Stock: Understanding Investment Performance

from Business 110: Business Math

Chapter 8 / Lesson 7
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