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 describes the steps to estimate the rate of return on the preferred stock in the given case.
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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 ...
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- BEng (Hons) , Birla Institute of Technology and Science, India
- MSc (Hons) , Birla Institute of Technology and Science, India
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