Nick is a security analyst in an investment banking firm. His supervisor asked him to evaluate a preferred stock. The par value of the preferred stock is $100 and it pays an annual dividend of $5.30 per share. Answer the following questions on the basis that the market required return is 7%.
a. What is the market value of the preferred stock?
b. Suppose an investor purchased the preferred stock today, held it for one year,
and sold it upon receiving the dividend. If the market required return is 8% when
he sold the preferred stock, what is the investor’s total rate of return?