An issue of 8.5% Series C preferred stock has a par value of $75 million or $40 per share and was sold to investors several years ago at par. According to the terms of the issue, the preferred is scheduled to be redeemed in 25 years at its par value of $40 per share. Dividends are paid quarterly but analyzed as if paid annually. The stock is currently trading at a discount for $35 per share.

17. Assume time has passed and it is now the beginning of year 15 [year 14 dividends have just been paid]. The preferred trades for $42. Using the Redemption schedule from question #8, [the redemption schedule requires redemption of $5 million of preferred shares at the end of years 16 through 24 and the balance of $30 million in year 25] what is the best estimate of the expected rate of return on the shares. Assume the issuer does not hold any shares purchased in the open market. Shares to be redeemed in future years will be randomly selected.

1. 7.64%
2. 8.03%
3. 8.50%
4. 10.03%
5. 15.28%