National Grit's preferred stock has a par value of $100, sells for $85 and pays $11 each year in dividends. What is the required rate of return?

Question

Quizplus · Accepted Answer

To calculate the required rate of return, we use the following formula:
Required Rate of Return = Annual Dividends / Current Market Price + Growth Rate
Since the preferred stock has a fixed dividend, the growth rate is zero. Therefore, the formula simplifies to:
Required Rate of Return = Annual Dividends / Current Market Price
Plugging in the numbers, we get:
Required Rate of Return = $11 / $85
Required Rate of Return = 0.129 or 12.9%

National Grit's Preferred Stock Has a Par Value of $100