Your employer pays a $2.00 dividend on its preferred shares.If the price of its preferred shares are $37 and floatation costs would be 1% per share,what is the required rate of return on the firm's preferred shares?

Question

Quizplus · Accepted Answer

To calculate the required rate of return, we need to use the following formula:

Dividend/Price - Floatation costs

Dividend = $2.00
Price = $37
Floatation costs = 1% of $37 = $0.37

Required rate of return = ($2.00/$37 - $0.37) = 0.0546 or 5.46% (rounded to two decimal places)

Therefore, the best choice is B.

Your Employer Pays a $2