Lindor Inc.'s $100 par value preferred stock pays a dividend fixed at 8% of par.To earn 12% on an investment in this stock, you need to purchase the shares at a per share price of

Question

Quizplus · Accepted Answer

To earn a 12% return on a preferred stock with a fixed 8% dividend, you must rely on capital appreciation to provide the additional 4% return. This means that you need to purchase the stock at a discount in order to achieve a higher yield.

To calculate the per share price that will provide a 12% return, we can use the following formula:

Dividend Yield + Capital Appreciation Yield = Total Return

0.08 + ((Par Value - Purchase Price) / Purchase Price) = 0.12

Solving for Purchase Price, we get:

Purchase Price = Par Value / (1 + Capital Appreciation Yield)

Purchase Price = $100 / (1 + 0.04) = $96.15

Since the question is asking for the per share price, we need to divide the purchase price by the par value:

$96.15 / $100 = 0.9615 or 96.15%

Therefore, the per share price that will provide a 12% return is $96.15, which is closest to answer choice B: $66.67 (since each share has a par value of $100, we need to purchase the shares at a per share price of $66.67 to achieve a 12% return). The other answer choices are either too high or too low.