Question

Smiling Elephant, Inc., has an issue of preferred stock outstanding that pays a $2.85 dividend every year, in perpetuity. If this issue currently sells for $77.32 per share, what is the required return?

Answer 1

3.69%

Step-by-step explanation:

The formula to compute the required rate of return is shown below:

= (Annual dividend per year) ÷ (Current selling price per share) × 100

= ($2.85) ÷ ($77.32) × 100

= 3.69%

We simply divide the annual dividend per year with the current selling price per share and then multiply it by percentage, so that the required rate of return can come in percentage