Morristown Industries Has an Issue of Preferred Stock Outstanding That

question 102

Multiple Choice

Morristown Industries has an issue of preferred stock outstanding that pays a $12.60 dividend every year in perpetuity.What is the required return if this issue currently sells for $80 per share?

• A)15.75 percent
• B)16.72 percent
• C)16.80 percent
• D)16.86 percent
• E)16.95 percent

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Definitions:

Principal Amount

The initial size of a loan or debt on which interest is calculated, or the original investment amount in a financial instrument.

Maturity

The date on which a financial obligation must be repaid in full.

Zero-Coupon Bond

A debt security that does not pay interest but is traded at a deep discount, rendering profit at maturity when the bond is redeemed for its full face value.

Imputed Interest

The interest on a loan that the IRS assumes was paid for tax purposes, even if no actual interest payment was made.