A Firm Has an Issue of Preferred Stock Outstanding That

question 83

Multiple Choice

A firm has an issue of preferred stock outstanding that has a stated annual dividend of $4. The required return on the preferred stock has been estimated to be 16 percent. The value of the preferred stock is ________.

• A) $64
• B) $16
• C) $25
• D) $50

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Definitions:

Risk-free Interest Rate

The theoretical return on investment with zero risk of financial loss, typically associated with government bonds.

Total Risk

The sum of all risks affecting an investment, including both systematic (market) and unsystematic (individual) risks.

Systematic Risk

The danger associated with the overall market or a specific sector of the market that cannot be mitigated by spreading investments.

Capital Asset Pricing Model

A model used to determine the theoretical rate of return of an asset, considering the asset’s risk relative to that of the market.