Preferred Products has issued preferred stock with an $7.26 annual dividend that will be paid in perpetuity. a. If the discount rate is 11%, at what price should the preferred sell?

Preferred Products has issued preferred stock with an $7.26 annual dividend that will be paid in perpetuity.

a.	If the discount rate is 11%, at what price should the preferred sell?

Current price

$

b.	At what price should the stock sell 1 year from now?

Future price

$

c.	What is the dividend yield, the capital gains yield, and the expected rate of return of the stock? (Leave no cells blank - be certain to enter "0" wherever required.)

Dividend yield	%
Capital gains yield	%
Expected rate of return	%

Explanation:

The preferred stock pays a level perpetuity of dividends. The expected dividend next year is the same as this year’s dividend ($7.26).

a.

$7.26/0.11 = $66

b.

$7.26/0.11 = $66

c.

Dividend yield = $7.26/$66 = 0.11 = 11%

Capital gains yield = 0

Expected rate of return = 11%