Each quarter, Transam Ltd pays a dividend on its perpetual preference share. Today, the share isselling at $83.45. If the required rate of return for such shares is 10.5 percent, what is the quarterly dividendpaid by this company?
Question
Each quarter, Transam Ltd pays a dividend on its perpetual preference share. Today, the share isselling at $83.45. If the required rate of return for such shares is 10.5 percent, what is the quarterly dividendpaid by this company?
Solution
The price of a perpetual preferred stock can be calculated using the formula:
Price = Dividend / Required Rate of Return
In this case, we are given the price ($83.45) and the required rate of return (10.5% per year), and we are asked to find the dividend. However, since the dividend is paid quarterly, we need to adjust the required rate of return to a quarterly rate.
Step 1: Convert the annual required rate of return to a quarterly rate.
10.5% per year = 10.5% / 4 per quarter = 2.625% per quarter
Step 2: Rearrange the formula to solve for the dividend.
Dividend = Price * Required Rate of Return
Step 3: Substitute the given values into the formula.
Dividend = 2.19
Therefore, the quarterly dividend paid by Transam Ltd is approximately $2.19.
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