Question

Meteora, Inc., has an issue of preferred stock outstanding that pays a $3.75 dividend every year, in perpetuity. If this issue currently sells for $81 per share, what is the required return?

Answer 1

Answer:

4.62%

Explanation:

price of a share of preferred stock can be gotten by the ratio of dividend and required return. But some preferred stock do have their dividend fixed with zero growth rate.

Preferred stock=Dividend/required return(R )

Making R subject of the formula

required return(R )= Dividend/Preferred stock

$3.75 dividend/$81 per share

R= 0.0462

R= 4.62%

Hence, the required return is 4.62%