Stocks and Bonds Question?

Question

If I have a preferred stock outstanding that pays a dividend of $5 at the end of each year.
The preferred stock sells for $60 a share. What is the preferred stock’s required rate of return?

Answer 1

First of all, you have to assume that the price of the stock---whether it's preferred or not has nothing to do with this question---does not go up in price during the time you own it. If it does, then that would be either a capital gain or a capital loss, depending on whether it went up or down.

But you are talking about a dividend and that is different than a capital gain. So what is the dividend rate on a stock that you bought for $60 a share if it pays you $5 at the end of the year? That is what you are asking.

To get the answer, you have to figure out what percentage 5 is of 60.

I'll give you an easy example: Say you paid $100 for the stock and it paid you a dividend of $10 at the end of the year. Well, $10 is 10% of 100, right? So that means it would be a dividend of 10%.

Now all you have to do is figure out what percentage $5 is of 60.

(The answer is more that 8 and less than 15)