ABC Canada pays a $2.50 dividend on its preferred shares.If the price of its preferred shares is $48 and floatation costs would be 5% per share,what is the required rate of return on ABC's preferred shares?

Question

Quizplus · Accepted Answer

First, we need to calculate the net proceeds from the sale of the preferred shares:

Net proceeds = Price per share - Floatation costs per share
                 = $48 - (5%*$48)
                 = $48 - $2.40
                 = $45.60

Next, we can use the dividend and the net proceeds to calculate the required rate of return:

Required rate of return = Dividend / Net proceeds
                                    = $2.50 / $45.60
                                    = 0.0548 or 5.48%

Therefore, the best answer is B) 5.48%, as this is the required rate of return for ABC's preferred shares.

ABC Canada Pays a $2