The preferred stock of the Pearson Institute pays a constant annual dividend of $3 and sells for $21. You believe the stock will sell for $12 in one year. You must, therefore, believe that the required
Return on the stock will be ____ % ___________ in one year.

Question

Quizplus · Accepted Answer

The required return is calculated as (Dividend + Price Change) / Initial Price. Here, ($3 + ($12 - $21)) / $21 = ($3 - $9) / $21 = -$6 / $21 = -28.57%. However, since the stock is expected to sell for less, the required return must be higher than the current yield of 10% (3/21), indicating choice E.

The Preferred Stock of the Pearson Institute Pays a Constant