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Vika [28.1K]
3 years ago
9

Western auto inc. pays a​ $1.77 preferred dividend every quarter and will maintain this policy forever. what price should you pa

y for one share of preferred stock if you want an annual return of​ 9.25% on your​ investment?
a. ​$74.54
Business
1 answer:
zhuklara [117]3 years ago
7 0
The answer is $76.54  Let us use 3 months as our period. Thus, we restate the annual required rate of9.25% as a quarterly (or three-month) rate of  = 2.3125% (or 0.023125).  Applying the constant dividend model with infinite horizon and with the  quarterly rate of return and a quarterly dividend of $1.77, we get:  = $76.54<span>.

Price of Preferred Stock = Dividend / required return of rate - growth rate</span>
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110 \times \frac{1-(1+0.0703048118151927)^{-10} }{0.0703048118151927} = PV\\

PV $771.5066

\frac{Maturity}{(1 + rate)^{time} } = PV  

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<em> rate  0.070304812</em>

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