A preferred stock issued by AT&T Corporation pays $2.25 per year, your required rate of return...

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Question

A preferred stock issued by AT&T Corporation pays $2.25 per year, your required rate of return...

A preferred stock issued by AT&T Corporation pays $2.25 per year, your required rate of return is 8%, how much would you pay per share to purchase this preferred stock?

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Answer 1

Answer #1

Solution:

The formula for calculating the Required Rate of Return on Investment in Preferred Stock is

Required Rate of Return = Annual dividend / Purchase price

As per the information given in the question we have

Annual dividend per share = $ 2.25 ; Required Rate of Return = 8 % = 0.08

Applying the above values in the formula we have

0.08 = $ 2.25 / Purchase price

0.08 * Purchase price = $ 2.25

Purchase price = $ 2.25 / 0.08

Purchase price = $ 28.1250

Purchase price = $ 28.13 ( when rounded off to two decimal places )

Thus the Purchase price of the preferred stock is = $ 28.13

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Answer 2

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