The value of a preferred stock is the stated ________ divided by the required rate of return on the preferred stock.
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A. B. C. D.Explanation
The value of preferred stock is the stated annual dividend divided by the required rate of return on preferred stock.
The value of a preferred stock can be determined by calculating the present value of its future cash flows, which in this case are the dividends paid by the stock. The formula to calculate the value of a preferred stock is:
Value of Preferred Stock = Annual Dividend / Required Rate of Return
Therefore, the correct answer is C. annual dividend.
The annual dividend represents the amount of cash flow the preferred stockholder expects to receive in one year. It is typically expressed as a fixed percentage of the stock's par value or face value. For example, if a preferred stock has a par value of $100 and an annual dividend rate of 5%, the annual dividend would be $5 ($100 * 5%).
The required rate of return on the preferred stock refers to the minimum rate of return that investors expect to earn in order to invest in the stock. This rate is influenced by factors such as the riskiness of the stock, prevailing interest rates, and the investor's required rate of return for similar investments. It represents the opportunity cost of investing in the preferred stock instead of other comparable investments.
By dividing the annual dividend by the required rate of return, we can determine the value of the preferred stock. This calculation reflects the present value of the future cash flows (dividends) and helps investors assess whether the stock is overvalued or undervalued relative to their required rate of return.