Rebello's preferred stock pays a dividend of $1.00 per quarter,and it sells for $57.50 per share.What is its effective annual (not nominal)rate of return?

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Quizplus · Accepted Answer

The effective annual rate of return can be calculated by first finding the annual dividend, which is $1.00 per quarter times 4 quarters, equaling $4.00 per year. Then, divide this by the price per share, $57.50, to get the nominal rate of return: $4.00 / $57.50 = 0.0696 or 6.96%. To find the effective annual rate, we use the formula for converting a nominal rate compounded quarterly to an effective annual rate: (1 + 0.0696/4)^(4) - 1 = 0.0714 or 7.14%.

Rebello's Preferred Stock Pays a Dividend of $1