On July 1, Kevin purchases 6,000 shares of preferred stock for $25.13 per share.

Question

On July 1, Kevin purchases 6,000 shares of preferred stock for $25.13 per share. The stock is to pay a dividend for $0.29(1.02)^(k-1) at the end of each quarter of the k-th year Kevin holds the stock. That is to say, he first receives four successive end-of-the quarter payments at a rate of $0.29 per share and then four successive end-of-the quarter payments at a rate of $0.29(1.02) per share etc. Find the yield rate for this purchase assuming all dividends are paid and Kevin holds the stock forever.

Explanation / Answer

Initial investment = 6000*25.13.

He gets a dividend of 0.29*4 in the first year....0.29*1.02*4 in the second year 0.29*1.02^2*4 in the third year and so on till forever.

So the amount that accumulates with him over the years in terms of dividends = 0.29*4+0.29*1.02*4+0.29*1.02^2*4+....................

=0.29*4*(1/1.02-1) = 58

SO the yeild on the investment = 58/25.13 = 230.79%

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