Question

(d) The CIMB's new saving account pays interest quarterly. It wishes to pay (effective annual return) 16% per year on this account. CIMB desires to advertise the annual percentage rate on this new account, instead of the effective rate, since its competitors state their interest on an annualized basis. What is the annualized rate that corresponds to an effective rate of 16% for this new account? (5 marks) (e) Wallace Container Company issued S100 par value preferred stock 12 years ago. The stock provided a 9 percent dividend yield at the time of issue. The preferred stock is now selling for $72. What is the cost of the preferred stock? (5 marks)

Answer 1

Let the annual rate of interest be x

(1+x/4)^4-1 = 0.16

x = 15.12%

Hence, annualized rate = 15.12%

Value of preferred Stock = Annual dividend/Cost of Stock

72 = 9/Cost

Cost = 12.5%