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%.
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Learn more about this topic:
from Business 110: Business MathChapter 8 / Lesson 7
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