If a preferred stock’s price is $40 and the preferred dividend is $4.125, what is the expected rate of return?

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To determine the expected rate of return on a preferred stock, you can use the formula:

Expected Rate of Return = Annual Dividend / Market Price of Preferred Stock.

In this case, the annual dividend is $4.125 and the market price of the preferred stock is $40. By applying the values to the formula, we get:

Expected Rate of Return = $4.125 / $40 = 0.103125, or 10.31%.

This result indicates that if you buy the preferred stock for $40, you can expect to receive an annual yield of 10.31% from the dividends. Preferred stock typically pays a fixed dividend, so this calculation allows investors to assess how much return they can expect relative to the stock's current price.

Understanding this concept is essential for evaluating investment options and comparing the returns of different securities.