What is the expected rate of return on preferred stock calculated as?

The expected rate of return on preferred stock is determined by dividing the fixed dividend by the current market price of the preferred stock. This calculation provides investors with a way to assess how much return they can expect relative to the price they would pay for the stock in the market.

Preferred stock typically pays a fixed dividend, which means that investors can rely on a predictable income stream from their investment. By using the market price in the calculation, you account for the investment's current valuation and therefore get a more accurate measure of the return relative to what you would have to pay to purchase the stock today.

This method essentially expresses the expected return as a percentage, which allows investors to compare it with other investments, such as common stocks or bonds. A higher expected rate of return relative to the price can indicate a more attractive investment opportunity.

In contrast, the other options involve different formulations that do not align with the standard measure of expected return as applicable in finance. For instance, dividing the market price by the fixed dividend would yield a measure of how many times the fixed dividend the market price is, which does not reflect expected return. Similarly, options that incorporate par value instead of market price are not conventional methods to calculate the expected rate of return on preferred stock.