Preferred Products has issued preferred stock with an annual

Preferred Products has issued preferred stock with an annual dividend of $8.16 that will be paid in perpetuity.

a. If the discount rate is 12.00%, at what price should the preferred sell? (Round your answer to 2 decimal places.)

b. At what price should the stock sell 1 year from now? (Round your answer to 2 decimal places.)

c. What is the dividend yield, the capital gains yield, and the expected rate of return of the stock? (Enter your answers as a whole percent.)

Solution

a)

Price of preferred stock:

= Annual dividend/Discount rate

= $8.16/12%

= $68

b)

Since it is perpetual bond, bond will sell at still $68

c)

Dividend yield will equal to disount rate i.e. 12%

Capital gains yield will be 0%

Expected rate of return will also be 12% as no changes are given.