Question

The ZZZ Corporation has preferred stock. The preferred stock pays a dividend per share every year of $6.50. The stock sells for $81.25 per share. TRUE or FALSE: The required return of investors in the stock is 8%.

Answer 1

Answer:

True

Explanation:

The statement is true because according to dividend growth method the price of the given preferred stock is $81.25.

Formula to calculate the prce of share using Dividend growth method is

Price of share = D0 / (Rate of return - Growth rate)

In case of preferred stock a stable dividend is paid and there is no growth in the dividend payment.

so

Price of share = D0 / (Rate of return - 0)

Price of share = D0 / Rate of return

Share price = $6.5 /  0.08

Share Price = $81.25

Answer 2

Answer:

The answer to the question is YES

Explanation:

What is Return on Investment (ROI)?

Return on investment (ROI) is a financial ratio used to calculate the benefit an investor will receive in relation to their investment cost. It is most commonly measured as net income divided by the original capital cost of the investment. The higher the ratio, the greater the benefit earned.

Therefore, the formula to find the Return on Investment for the question - The ZZZ Corporation has preferred stock. The preferred stock pays a dividend per share every year of $6.50. The stock sells for $81.25 per share. TRUE or FALSE: The required return of investors in the stock is 8%.

ROI = Net Profit ÷ Total Investment x 100

∴ $6.50 = Net Profit (Yearly Dividend par share);

   $81.25 = Total Investment (Market Price of the stock);

Applying the formula: 6.50/81.25 x 100 =7.97≅ 8% (approximately)