BEC MCQ – Expected Rate of Return on Preferred Stock
A company issued common stock and preferred stock. Projected growth rate of the common stock is 5%. The current quarterly dividend on preferred stock is $1.60. The current market price of the preferred stock is $80 and the current market price of the common stock is $95. What is the expected rate of return on the preferred stock?
8% is correct. This question is focused on preferred stock, and one of the benefits of preferred stock is that the shareholder receives a guaranteed dividend.
To calculate the expected rate of return on preferred stock, we need to first calculate the annual dividend, and then divide the annual dividend by the current market price of the preferred stock.
You might also be interested in...
What is common stock?
Common stock is the most basic form of ownership in a company. For example, when you buy a share of Apple stock in your E-Trade or Robinhood account, you are buying common stock. Common stock provides ownership in the common, as well as voting rights. However, the main drawback of common stock is that in […]
How do you calculate return on equity (ROE)?
The return on equity ratio (ROE) will indicate the overall return in which the organizations shareholders will be entitled to. This calculation will display the amount of money that was earned for each share for each dollar value of its common equity. This ratio will simply be impacted by a company’s net income, as opposed […]
How to calculate return on assets (ROA)?
Return on total assets indicates a company’s earnings before interest and taxes (EBIT) relative to its total net assets. ROA measures the organizations overall productivity of its assets (i.e. are the assets making the company money). If the company produces a high return on assets ratio, it will indicate that the company’s management has been […]