Question

Bedeker, Inc., has an issue of preferred stock outstanding that pays a $6.55 dividend every year in perpetuity. If this issue currently sells for $91 per share, what is the required return? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Answer 1

Answer:

The required rate of return is 7.20%

Explanation:

The price of a share that pays a particular dividend amount in perpetuity is given by the below formula:

price of share=dividend/required rate of return

price of share is $91.00 per share

dividend payable in perpetuity is $6.55

required rate of return is unknown

$91=$6.55/required rate of return

required rate of return =$6.55/$91

                                       =7.20%

to confirm the required of return,I divided the by the required rate of return as shown below:

6.55/0.0.72=$90.97 .approximately $91

That is a way to validate the computed required rate of return