Each quarter, Transam, Inc., pays a dividend on its perpetual preferred stock. Today, the stock is selling at $83.45. If the required rate of return for such stocks is 10.5 percent, what is the quarterly dividend paid by the firm? (Do not round intermediate calculations. Round final answer to two decimal places.)
A) $8.76
B) $10.50
C) $2.19
D) $2.63

Question

Quizplus · Accepted Answer

To calculate the quarterly dividend, we need to use the formula:

Dividend = Annual Dividend / Number of Payments per Year

Since the preferred stock is perpetual, the dividend stays the same each year. We can find the annual dividend by multiplying the current stock price by the dividend yield:

Annual Dividend = Stock Price x Dividend Yield

The dividend yield is simply the annual dividend divided by the stock price:

Dividend Yield = Annual Dividend / Stock Price

We are given that the required rate of return is 10.5%, which is the same as the dividend yield. Therefore:

Dividend Yield = 10.5% = 0.105

Annual Dividend = Stock Price x Dividend Yield = $83.45 x 0.105 = $8.77325

Now we can calculate the quarterly dividend:

Dividend = Annual Dividend / Number of Payments per Year = $8.77325 / 4 = $2.19331

Round to two decimal places:

Dividend = $2.19

Therefore, the correct answer is choice C.

Each Quarter, Transam, Inc