Question

Alpha's preferred stock currently has a market price equal to $80 per share. If the dividend paid on this stock is $6 per share, what is the required rate of return investors are demanding from Alpha's preferred stock?
a. 7.5%
b. 13.3%
c. 6.0%
d. $6.00

Answer 1

Answer:

r = 0.075 or 7.5%

Option a is the correct answer.

Explanation:

The required rate of return is the minimum return that the investors require on a stock based on the risk associated with that stock. To calculate the required rate of return on a preferred stock, we divide the dividend provided by the preferred stock by the market price of the stock.

r = Dividend / Market Price

r = 6 / 80

r = 0.075 or 7.5%