Question

Bedekar, Inc., has an issue of preferred stock outstanding that pays a $3.40 dividend every year in perpetuity. If this issue currently sells for $91 per share, what is the required return?

Answer 1

Answer:

i=4.84%

Explanation:

the key to answer this question, is to remember the model of return for a perpeuity dividend calculation:

$Value=\frac{1}{i-k}$

where value is the current stock price, i is the dividend yield and k is the growth rate, so applying to this particular case we have

k=3.4/91

k=3.74%

and solving i for the previous formula:

$91=\frac{1}{i-0.0374}$

$0.01098={i-0.0374}$

$i=4.84\%$