Calculate a Firm's Required Rates of Return for Both of Its

question 82

Essay

Calculate a firm's required rates of return for both of its equity components: Its common stock sells for $50.00 per share and will pay a $6.00 dividend which is expected to grow at a constant 5% rate.Its preferred stock sells for $22.50 per share and pays $1.80 in dividends.What accounts for the difference in returns,given that these are both forms of equity?

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Definitions:

Fixed Inputs

Resources or factors of production, such as land or capital, that remain constant regardless of the level of output or production.

Variable Inputs

Resources or inputs whose quantity can be changed in the short term to adjust the level of production.

Long-run Average Total Cost

A curve that shows the lowest average cost at which a firm can produce any given level of output in the long run, when all inputs are variable.

Fixed Costs

Fixed costs are business expenses that remain constant regardless of the level of production or sales, such as rent or salaries.