1. FET’s preferred stock is selling at $44 on the market and pays an annual dividend of $3.20 per share.
a. What is the expected rate of return on the stock?
b. If an investor's required rate of return is 10%, what is the value of the stock to that investor?
c. Considering the investor's required rate of return, does this stock seem to be a desirable investment?
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A Rate of Return (ROR) is the increase or loss of a venture over a definite time. The rate of yield is the increase (or loss) associated with the budget of an initial venture, naturally articulated in the form of a fraction. When the ROR is positive, it is reflected as an increase, and when the ROR is negative, it redirects a loss on the venture.
Bear in mind that the business must involve any increase made during the holding period of the venture within the formula; in this question, no data regarding the value of the stock. Thus, we have to include the dividend merely to calculate.
ROR = 3.2/ 44 = 7.27 %.
Value of stock = Dividend or Coupon / R
32 = 3.2 / 10%
The actual stockholder rate of return; this not an appropriate venture as the stakeholder requires a 10 % return, but the projected return is simply 7. 27 %.