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Tarpon Bay Industries preferred stock pays an annual dividend of​ $2.50 per share. If the​ risk-free rate is​ 2%, the expected return on the market is​ 8%, and Tarpon​ Bay's preferred stock is only​ one-half as risky as the market on​ average, what is the most that an investor should be willing to pay for a share of Tarpon Bay preferred stock​ TODAY?

Respuesta :

Answer:

Cost of preferred stock will be $50  

Explanation:

We have given annual dividend = $2.50

Risk free return [tex]R_f=2%[/tex] %

Expected return on market [tex]R_m=8%[/tex] %

[tex]\beta =0.5[/tex]

Required rate of return [tex]=R_f+\beta (R_m-R_f)[/tex]

= [tex]=2+0.5 (8-2)=5[/tex] %

Price of preferred stock is equal to ratio of dividend and required rate

So preferred stock [tex]=\frac{2.5}{0.05}=50[/tex]

So cost of preferred stock will be $50  

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