Clinton's preferred stock pays a dividend of $1.00 per quarter. If the price of the stock is $50.00, what is its effective annual (NOT nominal) rate of return?

Question

Quizplus · Accepted Answer

The quarterly dividend is $1.00, so the annual dividend is $4.00. The nominal annual rate of return is $4.00/$50.00 = 8.00%. To find the effective annual rate, we use the formula for effective annual rate: (1 + nominal rate/number of periods)^(number of periods) - 1. Here, (1 + 0.08/4)^4 - 1 = 8.24%.

Clinton's Preferred Stock Pays a Dividend of $1