Question

Oberholser, Inc., has an issue of preferred stock outstanding that pays a dividend of $3.15 every year in perpetuity. If this issue currently sells for $92 per share, what is the required return

Answer 1

The required rate of return is $3.42%

What is Perpetuity?

A constant cash flow with indefinite period of time is called perpetuity. In this question a perpetual payment of dividend is being made. so the price of the share is calculated by the formula of perpetuity.

Given:

Present value of perpetuity =  $92 per share

Cash flows = $3.15 every year

Find:

Rate of return can be calculated from the perpetuity formula

Present value of perpetuity = Cash flows / Required rate of return

Present value of perpetuity = Cash flows / Required rate of return

                                        $92 = $3.15 / Required rate of return

Required rate of return = $3.15 / $92

                                       = 0.0342

                                       = $ 3.42%

Therefore the Required return for Oberholser, Inc will be 3.42%.

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