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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?

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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 = 83.452.62583.45 * 2.625% = 2.19

Therefore, the quarterly dividend paid by Transam Ltd is approximately $2.19.

This problem has been solved

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