Assuming that a preferred stock is fairly priced, is worth $23, and has annual dividends of $6, what is its required rate of return?
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A. B. C. D. E.C
The value of a preferred stock is the present value of its dividends, which is equal to the annual dividend divided by the required rate of return. Rearranging this, the required rate of return is equal to the dividend divided by the stock price. In this question, the required rate of return is equal to 6/23 = 0.26 = 26%.