(Preferred stock expected return) You are planning to purchase 200 shares of pre

Question

(Preferred stock expected return) You are planning to purchase 200 shares of preferred stock and must choose between Stock A and Stock B. Stock A pays an annual dividend of $5.25 and is currently selling for $38. Stock B pays an annual dividend of $5.05 and is selling for $40. If your required return is 13.23 percent, which stock should you choose? What is the expected return of Stock A? 96 (Round to two decimal places.) What is the expected return of Stock B? % (Round to two decimal places.) If your required return is 13.23 percent, you should choose | . (Select from the drop-down menu.) Stock B Stock A None

Explanation / Answer

Expected Return = Annual Preference Dividend/Market Price of Stock

Stock A =5.25/38

=0.1382 or 13.82%

Stock B =5.05/40

=0.12625 or 12.625%

If Required Return is 13.23%

Stock A is best Option because Expected Return is 13.81%

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