Question

Arondale Aeronautics has perpetual preferred stock outstanding with a par value of $100. The stock pays a quarterly dividend of $3.00, and its current price is $125. What is its nominal annual rate of return? Do not round intermediate calculations. Round your answer to two decimal places. 9.6 % What is its effective annual rate of return? Do not round intermediate calculations. Round your answer to two decimal places. 9.95 %

Answer 1

Answer:

Annual Rate of Return = 12%

Effective Annual Rate of Return = 9.6%

Explanation:

Nominal Annual Rate of return = $\frac{Dividend\: per\: share\: for\: each\: year}{Par\: price\:per\:share} \times 100$

Annual Dividend per share = $3 per quarter $\times$ 4 = $12 per share

Current price per share = $125

Par Price per share = $100

Thus Annual Rate of return = $12/$100 = 12%

Effective Annual Rate of Return = $\frac{Dividend\: per\: share\: for\: each\: year}{Current\: price\:per\:share} \times 100$

= $\frac{12}{125} \times 100$ = 9.6%

Final Answer

Annual Rate of Return = 12%

Effective Annual Rate of Return = 9.6%