In Example 8-1, we calculated the value of Deutsche Bank’s preferred stock, where the stock had a par value of $25 and a coupon dividend rate of 7.35 percent, which resulted in a $1.84 dividend. In the earlier example 8.1, we computed the value of the stock given different required rates of return. At the time, the stock was actually selling for $26 in the market. What is the expected rate of return if you purchased the stock at the current market price?

Data from Example 8-1

Deutsche Bank has several preferred stock issues outstanding. One issue, a 7.35 percent preferred stock, was sold at its par value of $25. The stock pays an annual dividend of $1.84. The firm has the right to redeem the stock at 10 percent above par.

If investors have a 6 percent required rate of return today, in order to be interested in buying the stock, what value would they assign to the stock?

How would your answer change if their required return was only 4 percent? What if it increased to 9 percent?

How do you feel about the stock being redeemable?