Purchase Solution

# Expected rate of return of the preferred stock

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3. Preferred Stock. Preferred Products has issued preferred stock with an \$8 annual dividend that will be paid in perpetuity.

1. If the discount rate is 12 percent, at what price should the preferred sell?

2. At what price should the stock sell 1 year from now?

3. What is the dividend yield, the capital gains yield, and the expected rate of return of the stock?

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This shows the computation of Expected rate of return of the preferred stock

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1. at what price should the preferred sell=Present value of perpetuity = Annuity/discount rate
=8/.12
=\$66.7

2. At what price should the stock sell 1 year from now?
THe price that it will sell is ...

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