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12 June, 14:04

Bedeker, Inc., has an issue of preferred stock outstanding that pays a $6.55 dividend every year in perpetuity. If this issue currently sells for $91 per share, what is the required return? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e. g., 32.16.)

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  1. 12 June, 14:14
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    The required rate of return is 7.20%

    Explanation:

    The price of a share that pays a particular dividend amount in perpetuity is given by the below formula:

    price of share=dividend/required rate of return

    price of share is $91.00 per share

    dividend payable in perpetuity is $6.55

    required rate of return is unknown

    $91=$6.55/required rate of return

    required rate of return = $6.55/$91

    =7.20%

    to confirm the required of return, I divided the by the required rate of return as shown below:

    6.55/0.0.72=$90.97. approximately $91

    That is a way to validate the computed required rate of return
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