Question

Bedeker, Inc., has an issue of preferred stock outstanding that pays a $3.35 dividend every year in perpetuity. If this issue currently sells for $90 per share, what is the required return?

Answer 1

Answer:

$k_{p}$ = 3.72%

Explanation:

We know,

The price of a preferred stock is calculated by dividing the dividends from preferred stock by the required rate of return of preference share. Assuming the stock is growing constantly.

The formula to calculate -

Price of preferred stock = Dividend from preferred stock ÷ required rate of return

Given,

Dividend from preferred stock = $3.35

Price of preferred stock = $90

Therefore,

$90 = $3.35 ÷ $k_{p}$

or, $k_{p}$ = $3.35 ÷ $90

or, $k_{p}$ = 0.0372

Hence, $k_{p}$ = 3.72%

The required return = 3.72%