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5 July, 22:40

Smiling Elephant, Inc., has an issue of preferred stock outstanding that pays a $5.60 dividend every year, in perpetuity. If this issue currently sells for $80.40 per share, what is the required return

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  1. 6 July, 01:46
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    Required rate of return is 6.97%

    Explanation:

    The required rate of return can be ascertained from the price formula below when the subject of the formula is changed to rate of return instead of stock price:

    Stock price = dividend/required rate of return

    stock price is $80.40

    required rate of return is unknown

    the dividend on the preferred stock is $5.60

    required rate of return=dividend/stock price

    required rate of return = $5.60/$80.40=6.97%

    The required rate of return based on the stock price and dividend information provided is 6.97%
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