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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?

A) 2%

B) 7%

C) 8%

D) 13%

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.

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