Question

You are considering purchasing the Zions Bank $4.50 preferred stock. If you require a 4% return on this investment, what should you be willing to pay for this stock? $11.25 $112.50 $4.50 $45.00

Answer 1

Answer:

option $112.50

Explanation:

Data provided in the question:

Value of the Zions Bank preferred stock =  $4.50

Required rate of return on investment, r =  4% = 0.04

Now,

Current stock price can be calculated using the relation:

Required rate of return = $\frac{\textup{Dividend}}{\textup{current stock price}}$

or

0.04 = $\frac{\ 4.50}{\textup{current stock price}}$

or

current stock price =  $\frac{\ 4.50}{\textup{0.04}}$

or

current stock price = $112.5

Therefore,

we should be willing to pay $112.50

Hence,

The answer is option $112.50