Purchase Solution

Preferred Stock calculations

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Preferred Products has issued preferred stock with an \$8 annual dividend that will be paid in perpetuity.
a. If the discount rate is 12%, at what price should the preferred sell?
b. At what price should the stock sell one year from now?
c. What is the dividend yield of this stock?
d. What is the capital gains yield of this stock?
e. What is the expected rate of return of this stock?

Solution Summary

Preferred Stock: Calculations for price, dividend yield, capital gains yield and expected rate of return.

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Price of Preferred Stock=Dividend divided by Discount rate
Po= Div/ r
Div =Dividend in perpetuity
r=discount rate
Po= Current price

a. If the discount rate is 12%, at what price should the preferred sell?

r=12%
Div=\$8
P0=\$66.67=8/12%

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