Question

Nick's Enchiladas has preferred stock outstanding that pays a dividend of $3 at the end of each year. The preferred sells for $55 a share. What is the stock's required rate of return (assume the market is in equilibrium with the required return equal to the expected return)?

Answer 1

Answer: 5.45%

Step-by-step explanation:

The value of a preferred stock is calculated by the formula;

Value = Dividend / required return

Making required return the subject we have;

Required return = Dividend/ Value

= 3/55

= 0.05455

= 5.45%