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    Calculating the return on the preferred stock

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    BAC is considering an issue of preferred stock. The dividends are 8.12% of the $25 par value.

    a. If the current price is $26.25 per share, what is the return on the preferred stock?

    b. Suppose the preferred stock will mature in 20 years. If the price is $26.25 per share, what is the return on the preferred stock? HINT: This is just like a bond, but the face value is 25. For the problem, you can assume the dividends are annual.

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    Solution Preview

    Please refer attached file for better clarity.

    a. If the current price is $26.25 per share, what is the return on the preferred stock?
    Dividend=D=25*8.12%=$2.03
    Price of stock=P=$26.25
    Return on preferred stock=r=D/P=7.73%

    b. Suppose ...

    Solution Summary

    Solution describes the steps to estimate the rate of return on the preferred stock in the given case.

    $2.19