Assume that you would like to purchase 100 shares of preferred stock that pays an annual...
Assume that you would like to purchase 100 shares of preferred stock that pays an annual dividend of $6.00 per share. However, you have limited resources now, so you cannot afford the purchase price. In fact, the best you can do now is to invest your money in a mutual fund that offers an average return of 6% compounded monthly. Because the preferred stock is riskier, it has an annual rate of return of 12% (assume that this rate will remain constant into the foreseeable future). For you to be able to purchase this stock at the end of 5 years, how much must deposit in your bank account today?
Homework Answers
price of Preferred Stock = 6/0.12
Price of Preferred Stock= $50
Value of purchase = 100(50) = $5,000
Amount in mutual fund = 5,000/(1.06)^5
Amount in mutual fund= $3,736.29
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